<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 5, 1994
REGISTRATION NO. 33-53199
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
A. EXACT NAME OF TRUST:
TAX EXEMPT SECURITIES TRUST, SERIES 393
B. NAMES OF DEPOSITORS:
SMITH BARNEY SHEARSON INC.
KIDDER, PEABODY & CO. INCORPORATED
C. COMPLETE ADDRESSES OF DEPOSITORS' PRINCIPAL EXECUTIVE OFFICES:
SMITH BARNEY SHEARSON INC. KIDDER, PEABODY & CO. INCORPORATED
1345 Avenue of the Americas 60 Broad Street
New York, New York 10105 New York, New York 10004
D. NAMES AND COMPLETE ADDRESSES OF AGENTS FOR SERVICE:
STEPHEN J. TREADWAY GILBERT R. OTT, JR.
Smith Barney Shearson Inc. Kidder, Peabody & Co. Incorporated
1345 Avenue of the Americas 10 Hanover Square
New York, New York 10105 New York, New York 10005
COPY TO:
PIERRE DE SAINT PHALLE, ESQ.
Davis Polk & Wardwell
450 Lexington Ave.
New York, New York 10017
E. TITLE AND AMOUNT OF SECURITIES BEING REGISTERED:
AN INDEFINITE NUMBER OF UNITS OF BENEFICIAL INTEREST PURSUANT TO RULE 24F-2
PROMULGATED UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED.
F. PROPOSED MAXIMUM AGGREGATE OFFERING PRICE TO THE PUBLIC OF THE SECURITIES
BEING REGISTERED:
INDEFINITE
G. AMOUNT OF FILING FEE;
$500 (AS REQUIRED BY RULE 24f-2)
H. APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
[X] Check box if it is proposed that this filing will become effective
immediately upon filing pursuant to Rule 487.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
---------------------------------------------------------
Series 393
TAX EXEMPT California Trust 134 North Carolina Trust 8
SECURITIES Maryland Trust 90 Pennsylvania Trust 109
TRUST Minnesota Trust 111
- ---------------------- ---------------------------------------------------
13,500 UNITS
INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
IN THE OPINION OF COUNSEL UNDER EXISTING LAW, INTEREST INCOME TO THE TRUSTS AND
TO UNIT HOLDERS (EXCEPT IN CERTAIN INSTANCES DEPENDING UPON THE UNIT HOLDERS)
IS EXEMPT FROM REGULAR FEDERAL INCOME TAX AND FROM CERTAIN STATE AND LOCAL
PERSONAL INCOME TAXES, TO THE EXTENT INDICATED, IN THE STATE FOR WHICH A STATE
TRUST IS NAMED. CAPITAL GAINS, IF ANY, ARE SUBJECT TO TAX.
THE TAX EXEMPT SECURITIES TRUST, SERIES 393 consists of separate underlying
unit investment trusts designated as California Trust 134, Maryland Trust 90,
Minnesota Trust 111, North Carolina Trust 8 and Pennsylvania Trust 109 (the
"California Trust," the "Maryland Trust," the "Minnesota Trust", the "North
Carolina Trust," and the "Pennsylvania Trust," collectively, the "State Trusts"
or, singularly, the "State Trust") (the "Trusts" or the "Trust" as the context
requires). Each Trust was formed for the purpose of obtaining for its Unit
holders tax-exempt interest income and conservation of capital through
investment in a fixed portfolio of municipal bonds rated at the time of deposit
in the category A or better by Standard & Poor's Ratings Group, a division of
McGraw-Hill, Inc. ("Standard & Poor's), Moody's Investors Service, Inc.
("Moody's") or Fitch Investors Service, Inc. ("Fitch"). (See "Portfolio of
Securities".) Each State Trust is comprised of a fixed portfolio of interest-
bearing obligations issued primarily by or on behalf of the state for which
such State Trust is named and counties, municipalities, authorities or
political subdivisions thereof. Interest on all bonds in each Trust is in the
opinion of counsel under existing law, with certain exceptions, exempt from
regular Federal income taxes (see Part B, "Taxes") and from certain state and
local personal income taxes) in the state for which a State Trust is named, but
may be subject to other state and local taxes. (See discussions of State and
local taxes in Part C.)
THE PUBLIC OFFERING PRICE of the Units of each Trust during the initial public
offering period is equal to the aggregate offering price of the underlying
bonds in the Trust's portfolio divided by the number of Units outstanding in
such Trust, plus a sales charge. The Public Offering Price of the Units of each
Trust following the initial public offering period is equal to the aggregate
bid price of the underlying bonds in the Trust's portfolio divided by the
number of Units outstanding in such Trust, plus a sales charge. During the
initial public offering period the sales charge is equal to 4.70% of the Public
Offering Price (4.932% of the aggregate offering price of the bonds per Unit)
for each Trust, and following the initial public offering period this charge
will be equal to 5.00% of the Public Offering Price (5.263% of the aggregate
bid price of the bonds per Unit) for each Trust. See Part B, "Public Offering--
Distribution of Units" for a description of the initial public offering period.
If the Units had been available for sale on May 4, 1994, the Public Offering
Price per Unit (including the sales charge) would have been $1,013.67, $958.00,
$997.87, $1,000.21 and $1,012.34 for the California Trust, Maryland Trust,
Minnesota Trust, North Carolina Trust and Pennsylvania Trust, respectively. In
addition, there will be added an amount equal to accrued interest from the day
after the Date of Deposit to the date of settlement (normally five business
days after purchase).
THE SPONSORS, although not obligated to do so, intend to maintain a market for
the Units of the Trusts at prices based upon the aggregate bid price of the
underlying bonds, as more fully described under "Public Offering--Market for
Units" in Part B. If such a market is not maintained, a Unit holder may be able
to dispose of his Units only through redemption, at prices that are also based
upon the aggregate bid price of the underlying bonds.
MONTHLY DISTRIBUTIONS of principal and interest received by each Trust will be
made on or shortly after the fifteenth day of each month to holders of record
on the first day of that month. For further information regarding the
distributions by each Trust, see "Summary of Essential Information".
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
The date of this Prospectus is May 5, 1994
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 393
SUMMARY OF ESSENTIAL INFORMATION AS OF MAY 4, 1994#
SPONSORS RECORD DATES
Smith Barney Shearson Inc. The first day of each month,
Kidder, Peabody & Co. commencing June 1, 1994
Incorporated
DISTRIBUTION DATES
TRUSTEE
The fifteenth day of each
United States Trust Company of month,** commencing June 15,
New York 1994
EVALUATOR EVALUATION TIME
Kenny S & P Evaluation Services, As of 1:00 P.M. on the Date of
a division of Kenny Information Deposit. Thereafter, as of
Systems, Inc. 4:00 P.M. New York Time.
EVALUATOR'S FEE
DATE OF DEPOSIT AND OF TRUST
AGREEMENT
May 4, 1994 The Evaluator will receive a
fee of $.30 per bond per
evaluation. (See Part B,
"Evaluator--Responsibility"
and "Public Offering--Offering
Price".)
MANDATORY TERMINATION DATE*
Each Trust will terminate on the
date of maturity, redemption,
sale or other disposition of the
last Bond held in the Trust.
SPONSORS' ANNUAL PORTFOLIO
SUPERVISION FEE***
Maximum of $.25 per $1,000
face amount of the underlying
Bonds.
- -------
#The Date of Deposit. The Date of Deposit is the date on which the Trust
Agreement was signed and the deposit with the Trustee was made.
* The actual date of termination of each trust may be considerably earlier
(see Part B, "Amendment and Termination of the Trust Agreement--
Termination").
** The first monthly income distribution of $4.29, $3.91, $4.14, $4.09 and
$4.24 for the California Trust, Maryland Trust, Minnesota Trust, North
Carolina Trust and Pennsylvania Trust, respectively, will be made on June
15, 1994.
***In addition to this amount, the Sponsors may be reimbursed for bookkeeping
and other administrative expenses not exceeding their actual costs.
A-2
<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA MARYLAND MINNESOTA NORTH CAROLINA PENNSYLVANIA
TRUST 134 TRUST 90 TRUST 111 TRUST 8 TRUST 109
----------- ------------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C>
Principal Amount of Bonds in Trust....................... $2,250,000 $2,750,000 $3,000,000 $2,500,000 $3,000,000
Number of Units.......................................... 2,250 2,750 3,000 2,500 3,000
Principal Amount of Bonds in Trust per Unit.............. $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
Fractional Undivided Interest in Trust per Unit.......... 1/2,250 1/2,750 1/3,000 1/2,500 1/3,000
Minimum Value of Trust:
Trust Agreement may be Terminated if Principal Amount
is less than........................................... $1,125,000 $1,375,000 $1,500,000 $1,250,000 $1,500,000
Calculation of Public Offering Price per Unit*:
Aggregate Offering Price of Bonds in Trust.............. $2,173,572 $2,510,662 $2,852,911 $2,382,995 $2,894,291
========== ========== ========== ========== ==========
Divided by Number of Units.............................. $ 966.03 $ 912.97 $ 950.97 $ 953.20 $ 964.76
Plus: Sales Charge (4.70% of the Public Offering Price
for each Trust )........................................ $ 47.64 $ 45.03 $ 46.90 $ 47.01 $ 47.58
---------- ---------- ---------- ---------- ----------
Public Offering Price per Unit.......................... $ 1,013.67 $ 958.00 $ 997.87 $ 1,000.21 $ 1,012.34
Plus: Accrued Interest*................................. $ 1.15 $ 1.05 $ 1.11 $ 1.10 $ 1.14
---------- ---------- ---------- ---------- ----------
Total.................................................. $ 1,014.82 $ 959.05 $ 998.98 $ 1,001.31 $ 1,013.48
========== ========== ========== ========== ==========
Sponsors' Initial Repurchase Price per Unit (per Unit
Offering)
Price of Bonds)*........................................ $ 966.03 $ 912.97 $ 950.97 $ 953.20 $ 964.76
Approximate Redemption Price per Unit (per Unit Bid Price
of Bonds)**............................................. $ 962.03 $ 908.97 $ 946.97 $ 949.20 $ 960.76
---------- ---------- ---------- ---------- ----------
Difference Between per Unit Offering and Bid Prices of
Bonds................................................... $ 4.00 $ 4.00 $ 4.00 $ 4.00 $ 4.00
========== ========== ========== ========== ==========
Calculation of Estimated Net Annual Income per Unit:
Estimated Annual Income per Unit........................ $ 61.96 $ 56.58 $ 59.77 $ 58.95 $ 61.21
Less Estimated Trustee's Annual Fee***.................. $ 1.51 $ 1.45 $ 1.49 $ 1.48 $ 1.50
Less: Other Estimated Annual Expenses................... $ .93 $ .89 $ .92 $ .83 $ .91
---------- ---------- ---------- ---------- ----------
Estimated Net Annual Income per Unit.................... $ 59.52 $ 54.24 $ 57.36 $ 56.64 $ 58.80
========== ========== ========== ========== ==========
Calculation of Monthly Income Distribution per Unit:
Estimated Net Annual Income per Unit.................... $ 59.52 $ 54.24 $ 57.36 $ 56.64 $ 58.80
Divided by 12........................................... $ 4.96 $ 4.52 $ 4.78 $ 4.72 $ 4.90
Accrued interest from the day after the Date of Deposit
to the first record date**............................. $ 4.29 $ 3.91 $ 4.14 $ 4.09 $ 4.24
First distribution per unit.............................. $ 4.29 $ 3.91 $ 4.14 $ 4.09 $ 4.24
Daily Rate (360-day basis) of Income Accrual per Unit.... $ .1653 $ .1506 $ .1593 $ .1573 $ .1633
Estimated Current Return based on Public Offering
Price****............................................... 5.87% 5.66% 5.75% 5.66% 5.81%
Estimated Long-Term Return****........................... 5.89% 5.80% 5.78% 5.76% 5.81%
</TABLE>
- ---------------
* Accrued interest will be added from the day after the Date of Deposit to
the date of settlement (normally five business days after purchase).
** This figure will also include accrued interest from the day after the
Date of Deposit to the date of settlement (normally five business days
after purchase) and the net of cash on hand in the relevant Trust, accrued
expenses of such Trust and amounts distributable to holders of record of
Units of such Trust as of a date prior to the computation date, on a pro
rata share basis. (See Part B, "Redemption of Units -- Computation of
Redemption Price per Unit.")
*** Per $1,000 principal amount of Bonds, plus expenses. (See Part B,
"Rights of Unit Holders -- Distribution of Interest and Principal.")
**** The Estimated Current Return is calculated by dividing the Estimated
Net Annual Interest Income per Unit by the Public Offering Price per Unit.
The Estimated Net Annual Interest Income per Unit will vary with changes in
fees and expenses of the Trustee and the Evaluator and with the principal
prepayment, redemption, maturity, exchange or sale of Bonds while the
Public Offering Price will vary with changes in the offering price of the
underlying Bonds; therefore, there is no assurance that the present
Estimated Current Return indicated above will be realized in the future.
The Estimated Long-Term Return is calculated using a formula which (1)
takes into consideration, and factors in the relative weightings of, the
market values, yields (which takes into account the amortization of
premiums and the accretion of discounts) and estimated retirements of all
of the Bonds in the Trust and (2) takes into account the expenses and sales
charge associated with each Unit. Since the market values and estimated
retirements of the Bonds and the expenses of the Trust will change, there
is no assurance that the present Estimated Long-Term Return as indicated
above will be realized in the future. The Estimated Current Return and
Estimated Long-Term Return are expected to differ because the calculation
of the Estimated Long-Term Return reflects the estimated date and amount of
principal returned while the Estimated Current Return calculations include
only Net Annual Interest Income and Public Offering Price as of the Date of
Deposit. The effect of the delay in the payment to Unit holders for the
first few months of Trust operations, which results in a lower true return
to Unit holders, is not reflected in either calculation (a projected cash
flow statement as of the Date of Deposit is available upon request from the
Trustee).
A-3
<PAGE>
PORTFOLIO SUMMARY AS OF DATE OF DEPOSIT
SERIES 393
CALIFORNIA TRUST 134
The Portfolio of the California Trust contains 9 issues of Bonds of issuers
located in the State of California. All of the issues are payable from the
income of specific projects or authorities and are not supported by the
issuer's power to levy taxes. Although income to pay such Bonds may be derived
from more than one source, the primary sources of such income and the
percentage* of the Bonds in this Trust deriving income from such sources are as
follows: hospital and health care facilities: 31.8%; housing facilities: 18.1%;
educational facilities: 39.8%; tax allocation: 10.3%. The Trust is considered
to be concentrated in hospital facilities and educational facilities issues.+
(See Part B, "Tax Exempt Securities Trust--Portfolio--Risk Factors" for a brief
summary of additional considerations relating to certain of these issues.) Five
Bonds in this Trust have been issued with an "original issue discount." (See
Part B, "Taxes.") The average life to maturity of the Bonds in the California
Trust is 25.7 years.
As of the Date of Deposit, 61.9% of the Bonds in this Trust are rated by
Standard & Poor's (18.1% rated AAA, 11.3% rated AA and 32.5% rated A); 38.1%
are rated A by Moody's. For a description of the meaning of the applicable
rating symbols as published by the rating agencies, see Part B, "Bond Ratings."
It should be emphasized, however, that the ratings of the rating agencies
represent their opinions as to the quality of the Bonds which they undertake to
rate, and that these ratings are general and are not absolute standards of
quality and may change from time to time.
None of the Bonds in the California Trust were acquired from a Sponsor as
sole underwriter or from an underwriting syndicate in which a Sponsor
participated, or otherwise from a Sponsor's own organization. (See Part B,
"Public Offering--Sponsors' and Underwriters' Profits.")
MARYLAND TRUST 90
The Portfolio of the Maryland Trust contains 8 issues of Bonds of issuers
located in the State of Maryland. All of the issues are payable from the income
of specific projects or authorities and are not supported by the issuer's power
to levy taxes. Although income to pay such Bonds may be derived from more than
one source, the primary sources of such income and the percentage of the Bonds
in this Trust deriving income from such sources are as follows: hospital and
health care facilities: 29.6%; housing facilities: 44.8%; pollution control
facilities: 13.3%; recreational facilities: 12.3%; The Trust is considered to
be concentrated in hospital facilities and housing facilities issues.+ (See
Part B, "Tax Exempt Securities Trust--Portfolio--Risk Factors" for a brief
summary of additional considerations relating to certain of these issues.)
Three Bonds in this Trust have been issued with an "original issue discount."
(See Part B, "Taxes.") The average life to maturity of the Bonds in the
Maryland Trust is 26.7 years.
As of the Date of Deposit, 74.9% of the Bonds in this Trust are rated by
Standard & Poor's (36.0% rated AAA, 12.3% rated AA and 26.6% rated A); 25.1%
are rated by Moody's (8.7% rated Aa and 16.4% rated A). For a description of
the meaning of the applicable rating symbols as published by the rating
agencies, see Part B, "Bond Ratings." It should be emphasized, however, that
the ratings of the rating agencies represent their opinions as to the quality
of the Bonds which they undertake to rate, and that these ratings are general
and are not absolute standards of quality and may change from time to time.
8.7% of the Bonds in the Maryland Trust were acquired from a Sponsor as sole
underwriter or from an underwriting syndicate in which a Sponsor participated,
or otherwise from a Sponsor's own organization. (See Part B, "Public Offering--
Sponsors' and Underwriters' Profits.")
- -------
*Percentages computed on the basis of the aggregate offering price of the Bonds
in the Trust on the Date of Deposit.
+ A Trust is considered to be "concentrated" in a particular category when the
Bonds in that category constitute 25% or more of the aggregate offering price
of the Bonds in the Trust.
A-4
<PAGE>
MINNESOTA TRUST 111
The Portfolio of the Minnesota Trust contains 8 issues of Bonds of issuers
located in the State of Minnesota. All of the issues are payable from the
income of specific projects or authorities and are not supported by the
issuer's power to levy taxes. Although income to pay such Bonds may be derived
from more than one source, the primary sources of such income and the
percentage* of the Bonds in this Trust deriving income from such sources are as
follows: hospital and health care facilities: 50.7%; housing facilities: 40.9%;
power facilities: 8.4%. The Trust is considered to be concentrated in hospital
facilities and housing facilities issues.+ (See Part B, "Tax Exempt Securities
Trust--Portfolio--Risk Factors" for a brief summary of additional
considerations relating to certain of these issues.) Four Bonds in this Trust
have been issued with an "original issue discount." (See Part B, "Taxes.") The
average life to maturity of the Bonds in the Minnesota Trust is 27.6 years.
As of the Date of Deposit, 100% of the Bonds in this Trust are rated by
Standard & Poor's (14.8% rated AAA, 17.4% rated AA and 67.8% rated A). For a
description of the meaning of the applicable rating symbols as published by the
rating agencies, see Part B, "Bond Ratings." It should be emphasized, however,
that the ratings of the rating agencies represent their opinions as to the
quality of the Bonds which they undertake to rate, and that these ratings are
general and are not absolute standards of quality and may change from time to
time.
None of the Bonds in the Minnesota Trust were acquired from a Sponsor as sole
underwriter or from an underwriting syndicate in which a Sponsor participated,
or otherwise from a Sponsor's own organization. (See Part B, "Public Offering--
Sponsors' and Underwriters' Profits.")
NORTH CAROLINA TRUST 8
The Portfolio of the North Carolina Trust contains 11 issues of Bonds of
issuers located in the State of North Carolina and the Commonwealth of Puerto
Rico. Of the Bonds in the Trust, one was issued by an issuer in the
Commonwealth of Puerto Rico (representing 7.3%* of the Bonds in this Trust) and
is a general obligation of the Commonwealth. Two of the issues (representing
approximately 7.9% of the Bonds in the Trust) are general obligations of
governmental entities and are backed by the taxing power of those entities. The
remaining issues are payable from the income of specific projects or
authorities and are not supported by the issuer's power to levy taxes. Although
income to pay such Bonds may be derived from more than one source, the primary
sources of such income and the percentage of the Bonds in this Trust deriving
income from such sources are as follows: hospital and health care facilities:
26.2%; housing facilities: 17.6%; power facilities: 41.0%. The Trust is
considered to be concentrated in hospital facilities and power facilities
issues.+ (See Part B, "Tax Exempt Securities Trust--Portfolio--Risk Factors"
for a brief summary of additional considerations relating to certain of these
issues.) Five Bonds in this Trust have been issued with an "original issue
discount." (See Part B, "Taxes.") The average life to maturity of the Bonds in
the North Carolina Trust is 24.8 years.
As of the Date of Deposit, 92.1% of the Bonds in this Trust are rated by
Standard & Poor's (3.6% rated AAA, 35.9% rated AA and 52.6% rated A); 7.9% are
rated A by Moody's. For a description of the meaning of the applicable rating
symbols as published by the rating agencies, see Part B, "Bond Ratings." It
should be emphasized, however, that the ratings of the rating agencies
represent their opinions as to the quality of the Bonds which they undertake to
rate, and that these ratings are general and are not absolute standards of
quality and may change from time to time.
None of the Bonds in the North Carolina Trust were acquired from a Sponsor as
sole underwriter or from an underwriting syndicate in which a Sponsor
participated, or otherwise from a Sponsor's own organization. (See Part B,
"Public Offering--Sponsors' and Underwriters' Profits.")
- -------
* Percentages computed on the basis of the aggregate offering price of the
Bonds in the Trust on the Date of Deposit.
+ A Trust is considered to be "concentrated" in a particular category when the
Bonds in that category constitute 25% or more of the aggregate offering price
of the Bonds in the Trust.
A-5
<PAGE>
PENNSYLVANIA TRUST 109
The Portfolio of the Pennsylvania Trust contains 9 issues of Bonds of
issuers located in the Commonwealth of Pennsylvania and all of the issues are
payable from the income of specific projects or authorities and are not
supported by the issuer's power to levy taxes. Although income to pay such
Bonds may be derived from more than one source, the primary sources of such
income and the percentage* of the Bonds in this Trust deriving income from
such sources are as follows: hospital and health care facilities: 32.4%;
housing facilities: 8.9%; transportation facilities: 17.1%; educational
facilities: 41.6%. The Trust is considered to be concentrated in hospital
facilities and educational facilities issues.+ (See Part B, "Tax Exempt
Securities Trust--Portfolio--Risk Factors" for a brief summary of additional
considerations relating to certain of these issues.) Seven Bonds in this Trust
have been issued with an "original issue discount." (See Part B, "Taxes.") The
average life to maturity of the Bonds in the Pennsylvania Trust is 23.4 years.
As of the Date of Deposit, 100% of the Bonds in this Trust are rated by
Standard & Poor's (23.0% rated AAA and 77.0% rated A). For a description of
the meaning of the applicable rating symbols as published by the rating
agencies, see Part B, "Bond Ratings." It should be emphasized, however, that
the ratings of the rating agencies represent their opinions as to the quality
of the Bonds which they undertake to rate, and that these ratings are general
and are not absolute standards of quality and may change from time to time.
17.1% of the Bonds in the Pennsylvania Trust were acquired from a Sponsor as
sole underwriter or from an underwriting syndicate in which a Sponsor
participated, or otherwise from a Sponsor's own organization. (See Part B,
"Public Offering--Sponsors' and Underwriters' Profits.")
- -------
* Percentages computed on the basis of the aggregate offering price of the
Bonds in the Trust on the Date of Deposit.
+ A Trust is considered to be "concentrated" in a particular category when the
Bonds in that category constitute 25% or more of the aggregate offering price
of the Bonds in the Trust.
A-6
<PAGE>
UNDERWRITING
The names and addresses of the Underwriters and the number of Units to be
sold by them are as follows:
<TABLE>
<CAPTION>
UNITS
---------------------------------------------------------
CALIFORNIA MARYLAND MINNESOTA NORTH CAROLINA PENNSYLVANIA
TRUST 134 TRUST 90 TRUST 111 TRUST 8 TRUST 109
---------- -------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Smith Barney Shearson
Inc. .................. 1,500 2,300 2,600 2,250 2,750
1345 Avenue of the Amer-
icas
New York, New York 10105
Kidder, Peabody & Co.
Incorporated........... 750 100 100 250
60 Broad Street
New York, New York 10004
Dain Bosworth Incorpo-
rated.................. 100
100 Dain Tower
527 Market Avenue
Minneapolis, Minnesota
55402
J.C. Bradford & Co. .... 250
330 Commerce Street
Nashville, Tennessee
37201
Legg Mason Wood Walker,
Inc. .................. 250
111 South Calvert Street
Baltimore, Maryland
21202
Miller & Schroeder Fi-
nancial, Inc........... 100
220 South Sixth Street
P.O. Box 789
Minneapolis, Minnesota
55440
Raymond James & Associ-
ates................... 100
880 Carillon Parkway
P.O. Box 12749
St. Petersburg, Florida
33733
Wheat First Securities,
Inc. .................. 100
901 East Byrd Street
Richmond, Virginia 23219
----- ----- ----- ----- -----
Total................. 2,250 2,750 3,000 2,500 3,000
===== ===== ===== ===== =====
</TABLE>
A-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Sponsors and Unit Holders of
Tax Exempt Securities Trust, Series 393:
We have audited the accompanying statements of financial condition, including
the portfolios of securities, of Tax Exempt Securities Trust, Series 393
(comprising, respectively, California Trust 134, Maryland Trust 90, Minnesota
Trust 111, North Carolina Trust 8 and Pennsylvania Trust 109) as of May 4, 1994.
These financial statements are the responsibility of the Trustee (see note 5 to
the statements of financial condition). Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation with the Trustee of an irrevocable letter of credit deposited on
May 4, 1994 for the purchase of securities, as shown in the statements of
financial condition and portfolios of securities. An audit also includes
assessing the accounting principles used and significant estimates made by the
Trustee, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective trusts
constituting Tax Exempt Securities Trust, Series 393 as of May 4, 1994, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK
New York, N.Y.
May 4, 1994
A-8
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 393
STATEMENTS OF FINANCIAL CONDITION
AS OF DATE OF DEPOSIT, MAY 4, 1994
<TABLE>
<CAPTION>
SERIES 393
--------------------------------------------------------
TRUST PROPERTY
--------------------------------------------------------
CALIFORNIA MARYLAND MINNESOTA NORTH CAROLINA PENNSYLVANIA
TRUST 134 TRUST 90 TRUST 111 TRUST 8 TRUST 109
---------- ---------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Investment in Tax-Exempt Securities:
Bonds represented by purchase contracts backed by
letter of credit (1)........................................... $2,173,572 $2,510,662 $2,852,911 $2,382,995 $2,894,291
Accrued interest through the Date of Deposit on underlying
bonds (1)(2)................................................... 18,753 35,267 49,644 44,170 41,231
---------- ---------- ---------- ---------- ----------
Total........................................................ $2,192,325 $2,545,929 $2,902,555 $2,427,165 $2,935,522
========== ========== ========== ========== ==========
<CAPTION> LIABILITY AND INTEREST OF UNIT HOLDERS
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Liability:
Accrued interest through the Date of Deposit
underlying bonds (1)(2)........................................ $ 18,753 $ 35,267 $ 49,644 $ 44,170 $ 41,231
---------- ---------- ---------- ---------- ----------
Interest of Unit Holders:
Units of fractional undivided interest outstanding (California
Trust 134: 2,250; Maryland Trust 90: 2,750; Minnesota
Trust 111: 3,000; North Carolina Trust 8: 2,500;
Pennsylvania Trust 109: 3,000)
Cost to investors (3).......................................... 2,280,773 2,634,448 2,993,617 2,500,524 3,037,037
Less -- Gross underwriting commission (4)...................... 107,201 123,826 140,706 117,529 142,746
---------- ---------- ---------- ---------- ----------
Net amount applicable to investors............................. 2,173,572 2,510,662 2,852,911 2,382,995 2,894,291
---------- ---------- ---------- ---------- ----------
Total........................................................ $2,192,325 $2,545,929 $2,902,555 $2,427,165 $2,935,522
========== ========== ========== ========== ==========
</TABLE>
- ---------------
(1) Aggregate cost to each Trust of the Bonds listed under the Portfolios of
Securities on the immediately following pages is based on offering prices as
of 1:00 P.M. on May 4, 1994, the Date of Deposit, determined by the
Evaluator on the basis set forth in Part B, "Public Offering -- Offering
Price." Morgan Guaranty Trust Company of New York issued an irrevocable
letter of credit in the aggregate principal amount of $16,000,000 which was
deposited with the Trustee for the purchase of $13,500,000 principal amount
of Bonds pursuant to contracts to purchase such Bonds at the Sponsor's
aggregate cost of $12,849,188 plus $189,065 representing accrued interest
thereon through the Date of Deposit.
(2) The Indenture provides that the Trustee will advance amounts equal to the
accrued interest on the underlying securities of each Trust (net of accrued
expenses) through the Date of Deposit and that such amounts will be
distributed to the Sponsors as Unit holders of record on such date, as set
forth in Part B, "Rights of Unit Holders -- Distribution of Interest and
Principal."
(3) Aggregate public offering price (exclusive of interest) computed on 2,250,
2,750, 3,000, 2,500 and 3,000 Units of California Trust, Maryland Trust,
Minnesota Trust, North Carolina Trust and Pennsylvania Trust, respectively,
on the basis set forth in Part B, "Public Offering -- Offering Price."
(4) Sales charge of 4.70% computed on 2,250, 2,750, 3,000, 2,500 and 3,000 Units
of California Trust, Maryland Trust, Minnesota Trust, North Carolina Trust
and Pennsylvania Trust, respectively, on the basis set forth in Part B,
"Public Offering -- Offering Price."
(5) The Trustee has custody of and responsibility for all accounting and
financial books, records, financial statements and related data of each
Trust and is responsible for establishing and maintaining a system of
internal controls directly related to, and designed to provide reasonable
assurance as to the integrity and reliability of, financial reporting of
each Trust. The Trustee is also responsible for all estimates and accruals
reflected in each Trust's financial statements. The Evaluator determines the
price for each underlying Bond included in each Trust's Portfolio of
Securities on the basis set forth in Part B, "Public Offering -- Offering
Price." Under the Securities Act of 1933, as amended (the "Act"), the
Sponsors are deemed to be issuers of each Trust's Units. As such, the
Sponsors have the responsibility of issuers under the Act with respect to
financial statements of each Trust included in the Registration Statement
under the Act and amendment thereto.
A-9
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 393
CALIFORNIA TRUST 134--PORTFOLIO OF SECURITIES
AS OF MAY 4, 1994
<TABLE>
<CAPTION>
Cost of Yield on Annual
Redemption Securities Date of Interest
Aggregate Securities Represented By Ratings Provisions to Trust Deposit Income
Principal Purchase Contracts (1) (2) (3)(4) (4) to Trust
--------- ------------------------- ------- ---------- ---------- -------- ---------
<C> <S> <C> <C> <C> <C> <C>
1. $ 375,000 California Educational Facilities Authority
Refunding Revenue Bonds, Loyola Marymount A1* 10/1/02 @ 102 $ 380,606 6.400% $ 24,750
University, 6.60% Due 10/1/2022 SF 10/1/13 @ 100
2. 250,000 California Health Facilities Financing Authority,
Kaiser Permanente Refunding Revenue Bonds, 6.25% AA 3/1/01 @ 102 245,193 6.400 15,625
Due 3/1/2021 SF 3/1/17 @ 100
3. 250,000 California Statewide Communities Development
Authority, Certificates of Participation, Keiro A+ 3/1/04 @ 102 232,295 6.450 14,688
Nursing Home, 5.875% Due 3/1/2019 SF 3/1/10 @ 100
4. 250,000 State Public Works Board of the State of
California, Lease Revenue Bonds, Various California A- 10/1/04 @ 102 249,200 6.400 15,937
State University Projects, 6.375% Due 10/1/2019 SF 10/1/15 @ 100
5. 250,000 Apple Valley Unified School District,
California, Certificates of Participation, Apple A* 9/1/03 @ 102 235,678 6.500 15,125
Valley Unified School District Public Facilities SF 9/1/16 @ 100
Corportation, 6.05% Due 9/1/2021
6. 250,000 Central California Joint Powers Health Financing
Authority, Certificates of Participation, Community A* 2/1/03 @ 102 212,785 6.650 13,125
Hospitals of Central California Project, 5.25% Due SF 2/1/05 @ 100
2/1/2013
7. 100,000 Garden Grove, California, Agency Community
Development Tax Allocation Refunding Revenue Bonds, A 10/1/03 @ 102 92,276 6.400 5,700
Garden Grove Community Project, 5.70% Due 10/1/2013 SF 10/1/09 @ 100
8. 150,000 Rosemead Redevelopment Agency, Los Angeles County,
California, Redevelopment Project Area, Tax A- 10/1/03 @ 102 132,805 6.400 8,400
Allocation Bonds, 5.60% Due 10/1/2033 SF 10/1/19 @ 100
9. 375,000 City of Vista, California, Multifamily Housing
Revenue Refunding Bonds, Vista Hacienda Project, AAA 4/1/02 @ 102 392,734 6.300 26,062
6.95% Due 4/1/2017 SF 4/1/03 @ 100
---------- ---------- ----------
$2,250,000 $2,173,572 $ 139,412
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-10
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 393
MARYLAND TRUST 90--PORTFOLIO OF SECURITIES
AS OF MAY 4, 1994
<TABLE>
<CAPTION>
Cost of Yield on Annual
Redemption Securities Date of Interest
Aggregate Securities Represented By Ratings Provisions to Trust Deposit Income
Principal Purchase Contracts (1) (2) (3)(4) (4) to Trust
--------- ------------------------- ------- ---------- ---------- -------- --------
<C> <S> <C> <C> <C> <C> <C>
1. $ 395,000 Maryland Health and Higher Educational Facilities
Authority Refunding Revenue Bonds, Suburban A 7/1/03 @ 102 $ 330,493 6.400% $ 20,243
Hospital Issue, 5.125% Due 7/1/2021 SF 7/1/14 @ 100
2. 215,000 Housing Opportunities Commission of Montgomery
County, Montgomery County, Maryland, Single Family Aa* 7/1/02 @ 102 219,351 6.350 14,244
Mortgage Revenue Bonds, 6.625% Due 7/1/2028 SF 7/1/23 @ 100
3. 380,000 Montgomery County, Maryland, Pollution Control
Revenue Refunding Bonds, Potomac Electric Project, A+ 2/15/04 @ 102 335,270 6.250 20,425
5.375% Due 2/15/2024
4. 340,000 Montgomery County, Maryland, Revenue Authority,
Refunding Lease Revenue Bonds, Olney Indoor Swim AA- 10/1/04 @ 102 308,275 6.100 17,850
Center Project, 5.25% Due 10/1/2012 SF 10/1/05 @ 100
5. 500,000 Prince George's County, Maryland, Project and
Refunding Revenue Bonds, Dimensions Health A* 7/1/04 @ 102 412,560 6.650 26,500
Corporation Issue, 5.30% Due 7/1/2024 SF 7/1/15 @ 100
6. 220,000 Housing Authority of Prince George's County,
Maryland, Mortgage Revenue Refunding Bonds, Cherry AAA 9/20/03 @ 102 213,541 6.250 13,200
Hill Apartments Project, 6.00% Due 9/20/2015 SF 3/20/11 @ 100
7. 500,000 Housing Authority of Prince George's County,
Maryland, Mortgage Revenue Refunding Bonds, GNMA AAA 10/20/03 @ 102 500,000 6.250 31,250
Collateralized Laurel Crossing Apartments Project, SF 4/20/11 @ 100
6.25% Due 4/20/2020
8. 200,000 Housing Authority of Prince George's County,
Maryland, Mortgage Revenue Refunding Bonds, GNMA AAA 10/20/03 @ 102 191,172 6.300 11,900
Collateralized-Regent Street Station Apartments SF 4/20/04 @100
Project, 5.95% Due 10/20/2019
---------- ---------- --------
$2,750,000 $2,510,662 $155,612
---------- ---------- --------
---------- ---------- --------
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-11
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 393
MINNESOTA TRUST 111--PORTFOLIO OF SECURITIES
AS OF MAY 4, 1994
<TABLE>
<CAPTION>
Cost of Yield on Annual
Redemption Securities Date of Interest
Aggregate Securities Represented By Ratings Provisions to Trust Deposit Income
Principal Purchase Contracts (1) (2) (3)(4) (4) to Trust
--------- ------------------------- ------- ---------- ---------- -------- --------
<C> <S> <C> <C> <C> <C> <C>
1. $ 500,000 Minnesota Housing Finance Agency, Single Family
Mortgage Bonds, 6.30% Due 7/1/2025 AA+ 1/1/04 @ 102 $ 496,570 6.350% $ 31,500
SF 1/1/21 @ 100
2. 285,000 Northen Municipal Power Agency, Minnesota, Electric
System Revenue Refunding Bonds, 5.00% Due 1/1/2021 A 1/1/99 @ 100 240,645 6.200 14,250
3. 500,000 City of Bemidji, Minnesota, Hospital Facilities
First Mortgage Revenue Bonds, North Country Health A 9/1/01 @ 102 527,945 6.200 35,000
Services Project, 7.00% Due 9/1/2021 SF 9/1/12 @ 100
4. 500,000 City of Brooklyn Center, Minnesota, Multifamily
Housing Revenue Bonds, Ponds Family Housing A- 1/1/04 @ 102 468,645 6.400 29,500
Project, 5.90% Due 1/1/2020 SF 1/1/05 @ 100
5. 500,000 City of Mankato, Minnesota, Hospital Facilities
First Mortgage Revenue Bonds, Immanuel - St. A- 8/1/02 @ 102 496,675 6.350 31,500
Joseph's Hospital of Mankato, Inc. Project, 6.30% SF 8/1/06 @ 100
Due 8/1/2022
6. 250,000 City of Minneapolis, Minnesota, and Housing and
Redevelopment Authority of the City of Saint Paul, AAA 11/15/03 @ 102 204,600 6.200 11,875
Minnesota, Health Care System Revenue Bonds, SF 11/15/14 @100
HealthSpan, 4.75% Due 11/15/2018
7. 215,000 The Housing And Redevelopment Authority in and for
the City of St. Cloud, Minnesota, Multifamily A 9/1/03 @ 102 201,378 6.400 12,685
Housing Revenue Bonds, Germain Towers Project, SF 9/1/05 @ 100
5.90% Due 9/1/2020
8. 250,000 City of St. Louis Park, Minnesota, Health Care
Facilities Revenue Bonds HealthSystem Minnesota AAA 7/1/03 @ 102 216,453 6.200 13,000
Obligated Group, 5.20% Due 7/1/2023 SF 7/1/17 @ 100
------------ ---------- --------
$ 3,000,000 $2,852,911 $179,310
------------ ---------- --------
------------ ---------- --------
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-12
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 393
NORTH CAROLINA TRUST 8--PORTFOLIO OF SECURITIES
AS OF MAY 4, 1994
<TABLE>
<CAPTION>
Cost of Yield on Annual
Redemption Securities Date of Interest
Aggregate Securities Represented By Ratings Provisions to Trust Deposit Income
Principal Purchase Contracts (1) (2) (3)(4) (4) to Trust
--------- ------------------------- ------- ---------- ---------- -------- --------
<C> <S> <C> <C> <C> <C> <C>
1. $ 250,000 North Carolina Eastern Municipal Power Agency,
Power System Revenue Bonds, 5.75% Due 12/1/2016 A- 9/1/03 @ 102.5 $ 229,325 6.450% $ 14,375
SF 12/1/12 @ 100
2. 250,000 North Carolina Eastern Municipal Power Agency,
Power System Revenue Bonds, 6.40% Due 1/1/2021 A- 1/1/03 @ 102 250,000 6.399 16,000
SF 1/1/14 @ 100
3. 500,000 North Carolina Municipal Power Agency, Catawba
Electric Revenue Bonds, 6.25% Due 1/1/2017 A 1/1/03 @ 102 496,950 6.300 31,250
SF 1/1/16 @ 100
4. 125,000 North Carolina Medical Care Commission, Hospital
Revenue Bonds, Moore Regional Hospital Project, A+ 10/1/03 @ 102 104,874 6.300 6,250
5.00% De 10/1/2018 SF 10/1/14 @ 100
5. 200,000 North Carolina Medical Care Commission, Hospital
Revenue Bonds, Scotland Memorial Hospital Project, AA 10/1/04 @ 102 183,564 6.150 10,750
5.375% Due 10/1/2011 SF 10/1/05 @ 100
6. 445,000 North Carolina Housing Finance Agency, Multifamily
Revenue Bonds, 5.90% Due 7/1/2026 AA 1/1/03 @ 102 420,543 6.300 26,255
SF 1/1/15 @ 100
7. 95,000 City of Bessemer City, North Carolina, General
Obligation Refunding Bonds, 5.70% Due 4/1/2015 A* 4/1/04 @ 102 91,078 6.050 5,415
8. 100,000 City of Bessemer City, North Carolina, General
Obligation Refunding Bonds, 5.70% Due 4/1/2014 A* 4/1/04 @ 102 96,534 6.000 5,700
9. 250,000 The Charlotte-Mecklenburg Hospital Authority, North
Carolina, Health Care System Revenue Bonds, 6.25% AA 1/1/02 @ 102 250,870 6.200 15,625
Due 1/1/2020 SF 1/1/13 @ 100
10. 100,000 County of Wake, North Carolina, Hospital System
Revenue Bonds, 5.125% Due 10/1/2026 AAA 10/1/03 @ 102 85,052 6.200 5,125
SF 10/1/17 @ 100
11. 185,000 Puerto Rico Public Building Authority, Public
Education and Health Facilities Refunding Bonds, A 7/1/03 @ 101.50 174,205 6.250 10,637
5.75% Due 7/1/2015 SF 7/1/11 @ 100
---------- ---------- --------
$2,500,000 $2,382,995 $147,382
---------- ---------- --------
---------- ---------- --------
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-13
<PAGE>
TAX EXEMPT SECURITIES TRUST
PENNSYLVANIA TRUST 109--PORTFOLIO OF SECURITIES
AS OF MAY 4, 1994
<TABLE>
<CAPTION>
Cost of Yield on Annual
Redemption Securities Date of Interest
Aggregate Securities Represented By Ratings Provisions to Trust Deposit Income
Principal Purchase Contracts (1) (2) (3)(4) (4) to Trust
--------- ------------------------- ------- ---------- ---------- -------- ----------
<C> <S> <C> <C> <C> <C> <C>
1. $ 440,000 Allegheny County, Pennsylvania, Hospital
Development Authority, Hospital Revenue Bonds, A - $ 465,084 6.500% $ 30,800
Allegheny Valley Hospital, 7.00% Due 8/1/2015 SF 8/1/14 @ 100
2. 250,000 Chester Upland School Authority, Delaware County,
Pennsylvania, School Revenue Bonds, 5.60% Due A 11/15/04 @ 100 232,705 6.200 14,000
11/15/2014 SF 11/15/06 @100
3. 500,000 Delaware County, Authority, Commonwealth of
Pennsylvania, Haverfor College Revenue Bonds, AAA 11/15/03 @ 102 452,835 6.200 27,500
5.50% Due 11/15/2023 SF 11/15/14 @100
4. 500,000 East Whiteland-Tredyffrin Joint Transportation
Authority, Chester County, Pennsylania, Highway A- 1/1/04 @ 100 494,130 6.400 31,500
Improvement Revenue Refunding Bonds, 6.30% Due SF 1/1/13 @ 100
1/1/2016
5. 260,000 Gettysburg Municipal Authority, College Revenue
Bonds, Gettysburg College Project, 6.60% Due A- 2/15/02 @ 100 266,310 6.200 17,160
2/15/2012 SF 2/15/08 @ 100
6. 250,000 Montgomery County, Pennsylvania, Higher Education
and Health Authority, Hospital Revenue Bonds, AAA 6/1/04 @ 102 212,055 6.250 12,812
Abington Memorial Hospital, 5.125% Due 6/1/2024 SF 6/1/15 @ 100
7. 250,000 Redevelopment Authority of the City of
Philadelphia, Pennsylania, Home Improvement Loan A 12/1/04 @ 102 256,615 6.537 17,125
Revenue, FHA Title Insured Loans, 6.85% Due SF 12/1/10 @ 100
12/1/2012
8. 250,000 Scranton-Lackawanna Health and Welfare Authority,
City of Scranton, Lackawanna County, Pennsylvania, A- 3/1/02 @ 102 253,593 6.300 16,250
University Revenue Bonds, University of Scranton SF 3/1/08 @ 100
Project, 6.50% Due 3/1/2013
9. 300,000 South Fork Municipal Authority, Cambria County,
Pennsylvania, Hospital Revenue Bonds, Lee Hospital A- 7/1/03 @ 102 260,964 6.500 16,500
Project, 5.50% Due 7/1/2023 SF 7/1/12 @ 100
- ------------ ---------- --------
$ 3,000,000 $2,894,291 $183,647
- ------------ ---------- --------
- ------------ ---------- --------
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-14
<PAGE>
NOTES TO PORTFOLIO OF SECURITIES
(1) For a description of the meaning of the applicable rating symbols as
published by Standard & Poor's Ratings Group, a division of McGraw-Hill,
Inc. and Moody's Investors Service, Inc.(*), see Part B, "Bond Ratings".
(2) There is shown under this heading the year in which each issue of Bonds
initially is redeemable and the redemption price for that year; unless
otherwise indicated, each issue continues to be redeemable at declining
prices thereafter, but not below par. "SF" indicates a sinking fund has been
or will be established with respect to an issue of Bonds. The prices at
which Bonds may be redeemed or called prior to maturity may or may not
incluce a premium and, in certain cases, may be less than the cost of the
Bonds to a Trust. Certain Bonds in a Portfolio, including Bonds listed as
not being ssubject to redemption provisions, may be redeemed in whole or in
part other than by operation of the stated redemption or sinking fund
provisions under certain unusual or extraordinary circumstances specified in
the instruments setting forth the terms and provisions of such Bonds. For
example, see discussion of obligations of hoiusing authorities in Part B,
"Tax Exempt Securities Trust--Portfolio."
(3) Contracts to purchase Bonds were entered into during the period December 10,
1993, through May 4, 1994, with the final settlement date on May 26, 1994.
The Profit (Loss) to Sponsors on Deposit totals $(10,838), $(21,644),
$(20,518), $5,067 and $13,176 for the California Trust, Maryland Trust,
Minnesota Trust, North Carolina Trust and Pennsylvania Trust, respectively.
(4) Evaluation of the Bonds by the Evaluator is made on the basis of current
offering prices for the Bonds. The current offering prices of the Bonds are
greater than the current bid prices of the Bonds. The Redemption Price per
Unit and the public offering price of the Unites in the secondary market are
determined on the basis of the current bid prices of the Bonds. (See Part B,
"Public Offering-Offering Price" and "Rights of Unit Holders--Redemption of
Units.") Yield of Bonds was computed on the basis of offering prices on the
date of deposit. The aggregate bid price of the Bonds in the California
Trust, Maryland Trust, Minnesota Trust, North Carolina Trust and
Pennsylvania Trust on May 4, 1994, was $2,164,572, $2,499,662, $2,840,911,
$2,372,995 and $2,882,291, respectively.
A-15
<PAGE>
PROSPECTUS--PART B:
- --------------------------------------------------------------------------------
NOTE THAT PART B OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED UNLESS ACCOMPANIED
BY PART A.
- --------------------------------------------------------------------------------
TAX EXEMPT SECURITIES TRUST
THE TRUSTS
Each Trust is one of a series of similar but separate unit investment trusts
created under the laws of the State of New York by a Trust Indenture and
Agreement and related Reference Trust Agreement dated the Date of Deposit
(collectively, the "Trust Agreement"), among Smith Barney Shearson Inc. and
Kidder, Peabody & Co. Incorporated, as sponsors (the "Sponsors" or "Co-
sponsors"), United States Trust Company of New York, as Trustee, and Kenny
Information Systems, Inc., as Evaluator. Each Trust containing Bonds of a State
for which such Trust is named (a "State Trust") and each National Trust,
Selected Term Trust, Long-Intermediate Term Trust, Intermediate Term Trust,
Short-Intermediate Term Trust and Short Term Trust are referred to herein as
the "Trust" or "Trusts," unless the context requires otherwise. On the Date of
Deposit, the Sponsors deposited contracts and funds (represented by a certified
check or checks and/or an irrevocable letter or letters of credit, issued by a
major commercial bank) for the purchase of certain interest-bearing obligations
(the "Bonds") and/or Units of preceding Series of Tax Exempt Securities Trust
(such Bonds and Units of preceding Series of Tax Exempt Securities Trust, if
any, (the "Deposited Units") being referred to herein collectively as the
"Securities"). The Trustee thereafter delivered to the Sponsors registered
certificates of beneficial interest (the "Certificates") representing the units
(the "Units") comprising the entire ownership of each Trust, which Units are
being offered hereby. References to multiple Trusts in Part B herein should be
read as references to a single Trust if Part A indicates the creation of only
one Trust.
Notwithstanding the availability of the above-mentioned certified check or
checks and/or irrevocable letter or letters of credit, it is expected that the
Sponsors will pay for the Bonds as the contracts for their purchase become due.
A substantial portion of such contracts have not become due by the date of this
Prospectus. To the extent Units are sold prior to the settlement of such
contracts, the Sponsors will receive the purchase price on such Units prior to
the time at which they pay for Bonds pursuant to such contracts and have the
use of such funds during this period.
OBJECTIVES
The objectives of a Trust are tax-exempt income and conservation of capital
through an investment in a diversified portfolio of municipal bonds. There is,
of course, no guarantee that a Trust's objectives will be achieved since the
payment of interest and the preservation of principal are dependent upon the
continued ability of the issuers of the bonds to meet such obligations.
Subsequent to the Date of Deposit, the ratings of the Bonds set forth in Part
A--"Portfolio of Securities" may decline due to, among other factors, a decline
in creditworthiness of the issuer of said Bonds.
PORTFOLIO
The following factors, among others, were considered in selecting the Bonds
for each Trust: (1) the Bonds are obligations of the states, counties,
territories or municipalities of the United States and authorities or political
subdivisions thereof, so that the interest on them will, in the opinion of
recognized bond counsel to the issuing governmental authorities, be exempt from
Federal tax under existing law to the extent described in "Taxes", (2) all the
Bonds deposited in a State Trust are obligations of the State for which such
Trust is named or of the counties, territories or municipalities of such State,
and authorities or political subdivisions thereof, or of the Territory of Guam
or the Commonwealth of Puerto Rico, so that the interest on them will, in the
opinion of recognized bond counsel to the issuing governmental authorities, be
exempt from Federal income tax under existing law to the extent described in
"Taxes" and from state income taxes in the state for which such State Trust is
named to the extent described in Part C, (3) the Bonds were chosen in part on
the basis of their respective maturity dates, (4) the Bonds are diversified as
to purpose of issue and location of issuer, except in the case of a State Trust
where the Bonds are diversified only as to purpose of issue, and (5) in the
opinion of the Sponsors, the Bonds are fairly valued relative to other bonds of
comparable quality and maturity.
The Bonds in the Portfolio of a Trust were chosen in part on the basis of
their respective maturity dates. The Bonds in each Trust will have a dollar-
weighted average portfolio maturity as designated in Part A--"Portfolio Summary
as of Date of Deposit." For the actual maturity date of each of the Bonds
contained in a Trust, which date may be earlier or later than the dollar-
weighted average portfolio maturity of the Trust, see Part A, "Portfolio of
Securities." A sale or other disposition of a Bond by the Trust prior to the
maturity of such Bond may be at a price which results in a loss to the Trust.
The inability of an issuer to pay the principal amount due upon the maturity of
a Bond would result in a loss to the Trust.
B-1
<PAGE>
In the event that any contract for the purchase of any Bond fails, the
Sponsors are authorized under the Trust Agreement, subject to the conditions
set forth below, to instruct the Trustee to acquire other securities (the
"Replacement Bonds") for inclusion in the Portfolio of the affected Trust. Any
Replacement Bonds must be deposited not later than the earlier of (i) the first
monthly Distribution Date of the Trust and (ii) 90 days after such Trust was
established. The cost and aggregate principal amount of a Replacement Bond may
not exceed the cost and aggregate principal amount of the Bond which it
replaces. In addition, a Replacement Bond must (1) be a tax-exempt bond; (2)
have a fixed maturity or disposition date comparable to the Bond it replaces;
(3) be purchased at a price that results in a yield to maturity and in a
current return, in each case as of the execution and delivery of the Trust
Agreement, which is approximately equivalent to the yield to maturity and
current return of the Bond which it replaces; (4) be purchased within twenty
days after delivery of notice of the failed contracts and; (5) be rated in a
category A or better by Standard & Poor's Corporation, Moody's Investors
Service, Fitch Investors Service, Inc., or Duff & Phelps Credit Rating Co.
Whenever a Replacement Bond has been acquired for a Trust, the Trustee shall,
within five days thereafter, notify all Unit holders of such Trust of the
acquisition of the Replacement Bond.
In the event that a contract to purchase Bonds fails and Replacement Bonds
are not acquired, the Trustee will, not later than the second monthly
Distribution Date, distribute to Unit holders the funds attributable to the
failed contract. The Sponsors will, in such a case, refund the sales charge
applicable to the failed contract. If less than all the funds attributable to a
failed contract are applied to purchase Replacement Bonds, the remaining moneys
will be distributed to Unit holders not later than the second monthly
Distribution Date. Moreover, the failed contract will reduce the Estimated Net
Annual Income per Unit, and may lower the Estimated Current Return and
Estimated Long-Term Return.
Risk Factors
Certain Bonds in a Trust may have been purchased by the Sponsors on a "when,
as and if issued" basis; that is, they had not yet been issued by their
governmental entity on the Date of Deposit (although such governmental entity
had committed to issue such Bonds). Contracts relating to such "when, as and if
issued" Bonds are not expected to be settled by the first settlement date for
Units. In the case of these and/or certain other Bonds, the delivery of the
Bonds may be delayed ("delayed delivery") or may not occur. Unit holders who
purchased their Units of a Trust prior to the date such Bonds are actually
delivered to the Trustee may have to make a downward adjustment in the tax
basis of their Units for interest accruing on such "when, as and if issued" or
"delayed delivery" Bonds during the interval between their purchase of Units
and delivery of such Bonds, since the Trust and the Unit holders will not be
reimbursing the Sponsors for interest accruing on such "when, as and if issued"
or "delayed delivery" Bonds during the period between the settlement date for
the Units and the delivery of such Bonds into the Trust. (See "Taxes.") Such
adjustment has been taken into account in computing the Estimated Current
Return and Estimated Long-Term Return set forth herein, which is slightly lower
than Unit holders may receive after the first year. (See Part A, "Summary of
Essential Information.") To the extent that the delivery of such Bonds is
delayed beyond their respective expected delivery dates, the Estimated Current
Return and Estimated Long-Term Return for the first year may be lower than
indicated in the "Summary of Essential Information" in Part A.
Most of the Bonds in the Portfolio of a Trust are subject to redemption prior
to their stated maturity date pursuant to sinking fund or call provisions. (See
Part A--"Portfolio Summary as of Date of Deposit" for information relating to
the particular Trust described therein.) In general, a call or redemption
provision is more likely to be exercised when the offering price valuation of a
bond is higher than its call or redemption price, as it might be in periods of
declining interest rates, than when such price valuation is less than the
bond's call or redemption price. To the extent that a Bond was deposited in a
Trust at a price higher than the price at which it is redeemable, redemption
will result in a loss of capital when compared with the original public
offering price of the Units. Conversely, to the extent that a Bond was acquired
at a price lower than the redemption price, redemption will result in an
increase in capital when compared with the original public offering price of
the Units. Monthly distributions will generally be reduced by the amount of the
income which would otherwise have been paid with respect to redeemed bonds. The
Estimated Current Return and Estimated Long-Term Return of the Units may be
affected by such redemptions. Each Portfolio of Securities in Part A contains a
listing of the sinking fund and call provisions, if any, with respect to each
of the Bonds in a Trust. Because certain of the Bonds may from time to time
under certain circumstances be sold or redeemed or will mature in accordance
with their terms and the proceeds from such events will be distributed to Unit
holders and will not be reinvested, no assurance can be given that a Trust will
retain for any length of time its present size and composition. NEITHER THE
SPONSORS NOR THE TRUSTEE SHALL BE LIABLE IN ANY WAY FOR ANY DEFAULT, FAILURE OR
DEFECT IN ANY BOND.
The Portfolio of the Trust may consist of some Bonds whose current market
values were below face value on the Date of Deposit. A primary reason for the
market value of such Bonds being less than face value at maturity is that the
interest coupons of such Bonds are at lower rates than the current market
interest rate for comparably rated Bonds, even though at the time of the
issuance of such Bonds the interest coupons thereon represented then prevailing
interest rates on comparably rated Bonds then newly issued. Bonds selling at
market discounts tend to increase in market value as they approach maturity
when the principal amount is payable. A market discount tax-exempt Bond held to
maturity will have a larger portion of its total return in the form of taxable
ordinary income and less in the form of tax-exempt income than a comparable
Bond bearing interest at current market rates. Under the provisions of the
Internal Revenue
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Code in effect on the date of this Prospectus any ordinary income attributable
to market discount will be taxable but will not be realized until maturity,
redemption or sale of the Bonds or Units.
As set forth under "Portfolio Summary as of Date of Deposit", the Trust may
contain or be concentrated in one or more of the classifications of Bonds
referred to below. A Trust is considered to be "concentrated" in a particular
category when the Bonds in that category constitute 25% or more of the
aggregate value of the Portfolio. (See Part A--"Portfolio Summary as of Date of
Deposit" for information relating to the particular Trust described therein.)
An investment in Units of the Trust should be made with an understanding of the
risks that these investments may entail, certain of which are described below.
GENERAL OBLIGATION BONDS. Certain of the Bonds in the Portfolio may be
general obligations of a governmental entity that are secured by the taxing
power of the entity. General obligation bonds are backed by the issuer's pledge
of its full faith, credit and taxing power for the payment of principal and
interest. However, the taxing power of any governmental entity may be limited
by provisions of state constitutions or laws and an entity's credit will depend
on many factors, including an erosion of the tax base due to population
declines, natural disasters, declines in the state's industrial base or
inability to attract new industries, economic limits on the ability to tax
without eroding the tax base and the extent to which the entity relies on
Federal or state aid, access to capital markets or other factors beyond the
entity's control.
As a result of the recent recession's adverse impact upon both their revenues
and expenditures, as well as other factors, many state and local governments
are confronting deficits and potential deficits which are the most severe in
recent years. Many issuers are facing highly difficult choices about
significant tax increases and/or spending reductions in order to restore
budgetary balance. Failure to implement these actions on a timely basis could
force the issuers to depend upon market access to finance deficits or cash flow
needs.
In addition, certain of the Bonds in the Trust may be obligations of issuers
(including California issuers) who rely in whole or in part on ad valorem real
property taxes as a source of revenue. Certain proposals, in the form of state
legislative proposals or voter initiatives, to limit ad valorem real property
taxes have been introduced in various states, and an amendment to the
constitution of the State of California, providing for strict limitations on ad
valorem real property taxes, has had a significant impact on the taxing powers
of local governments and on the financial conditions of school districts and
local governments in California. It is not possible at this time to predict the
final impact of such measures, or of similar future legislative or
constitutional measures, on school districts and local governments or on their
abilities to make future payments on their outstanding debt obligations.
INDUSTRIAL DEVELOPMENT REVENUE BONDS ("IDRS"). IDRs, including pollution
control revenue bonds, are tax-exempt securities issued by states,
municipalities, public authorities or similar entities ("issuers") to finance
the cost of acquiring, constructing or improving various projects, including
pollution control facilities and certain industrial development facilities.
These projects are usually operated by corporate entities. IDRs are not general
obligations of governmental entities backed by their taxing power. Issuers are
only obligated to pay amounts due on the IDRs to the extent that funds are
available from the unexpended proceeds of the IDRs or receipts or revenues of
the issuer under arrangements between the issuer and the corporate operator of
a project. These arrangements may be in the form of a lease, installment sale
agreement, conditional sale agreement or loan agreement, but in each case the
payments to the issuer are designed to be sufficient to meet the payments of
amounts due on the IDRs.
IDRs are generally issued under bond resolutions, agreements or trust
indentures pursuant to which the revenues and receipts payable under the
issuer's arrangements with the corporate operator of a particular project have
been assigned and pledged to the holders of the IDRs or a trustee for the
benefit of the holders of the IDRs. In certain cases, a mortgage on the
underlying project has been assigned to the holders of the IDRs or a trustee as
additional security for the IDRs. In addition, IDRs are frequently directly
guaranteed by the corporate operator of the project or by another affiliated
company. Regardless of the structure, payment of IDRs is solely dependent upon
the creditworthiness of the corporate operator of the project or corporate
guarantor. Corporate operators or guarantors that are industrial companies may
be affected by many factors which may have an adverse impact on the credit
quality of the particular company or industry. These include cyclicality of
revenues and earnings, regulatory and environmental restrictions, litigation
resulting from accidents or environmentally-caused illnesses, extensive
competition (including that of low-cost foreign companies), unfunded pension
fund liabilities or off-balance sheet items, and financial deterioration
resulting from leveraged buy-outs or takeovers. However, certain of the IDRs in
the Portfolio may be additionally insured or secured by letters of credit
issued by banks or otherwise guaranteed or secured to cover amounts due on the
IDRs in the event of default in payment by an issuer.
HOSPITAL AND HEALTH CARE FACILITY BONDS. The ability of hospitals and other
health care facilities to meet their obligations with respect to revenue bonds
issued on their behalf is dependent on various factors, including the level of
payments received from private third-party payors and government programs and
the cost of providing health care services.
A significant portion of the revenues of hospitals and other health care
facilities is derived from private third-party payors and government programs,
including the Medicare and Medicaid programs. Both private third-party payors
and government programs have undertaken cost containment measures designed to
limit payments made to health care facilities. Furthermore, government programs
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are subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings and government funding restrictions, all of which may
materially decrease the rate of program payments for health care facilities.
There can be no assurance that payments under governmental programs will remain
at levels comparable to present levels or will, in the future, be sufficient to
cover the costs allocable to patients participating in such programs. In
addition, there can be no assurance that a particular hospital or other health
care facility will continue to meet the requirements for participation in such
programs.
The costs of providing health care services are subject to increase as a
result of, among other factors, changes in medical technology and increased
labor costs. In addition, health care facility construction and operation is
subject to federal, state and local regulation relating to the adequacy of
medical care, equipment, personnel, operating policies and procedures, rate-
setting, and compliance with building codes and environmental laws. Facilities
are subject to periodic inspection by governmental and other authorities to
assure continued compliance with the various standards necessary for licensing
and accreditation. These regulatory requirements are subject to change and, to
comply, it may be necessary for a hospital or other health care facility to
incur substantial capital expenditures or increased operating expenses to
effect changes in its facilities, equipment, personnel and services.
Hospitals and other health care facilities are subject to claims and legal
actions by patients and others in the ordinary course of business. Although
these claims are generally covered by insurance, there can be no assurance that
a claim will not exceed the insurance coverage of a health care facility or
that insurance coverage will be available to a facility. In addition, a
substantial increase in the cost of insurance could adversely affect the
results of operations of a hospital or other health care facility. The Clinton
Administration may impose regulations which could limit price increases for
hospitals or the level of reimbursements for third-party payors or other
measures to reduce health care costs and make health care available to more
individuals, which would reduce profits for hospitals. Some states, such as New
Jersey, have significantly changed their reimbursement systems. If a hospital
cannot adjust to the new system by reducing expenses or raising rates,
financial difficulties may arise. Also, Blue Cross has denied reimbursement for
some hospitals for services other than emergency room services. The lost volume
would reduce revenues unless replacement patients were found.
Certain hospital bonds may provide for redemption at par at any time upon the
sale by the issuer of the hospital facilities to a non-affiliated entity, if
the hospital becomes subject to ad valorem taxation, or in various other
circumstances. For example, certain hospitals may have the right to call bonds
at par if the hospital may be legally required because of the bonds to perform
procedures against specified religious principles or to disclose information
that is considered confidential or privileged. Certain FHA-insured bonds may
provide that all or a portion of these bonds, otherwise callable at a premium,
can be called at par in certain circumstances. If a hospital defaults upon a
bond obligation, the realization of Medicare and Medicaid receivables may be
uncertain and, if the bond obligation is secured by the hospital facilities,
legal restrictions on the ability to foreclose upon the facilities and the
limited alternative uses to which a hospital can be put may severely reduce its
collateral value.
The Internal Revenue Service is currently engaged in a program of intensive
audits of certain large tax-exempt hospital and health care facility
organizations. Although these audits have not yet been completed, it has been
reported that the tax-exempt status of some of these organizations may be
revoked. At this time, it is uncertain whether any of the hospital and health
care facility bonds held by the Trust will be affected by such audit
proceedings.
SINGLE FAMILY AND MULTI-FAMILY HOUSING BONDS. Multi-family housing revenue
bonds and single family mortgage revenue bonds are state and local housing
issues that have been issued to provide financing for various housing projects.
Multi-family housing revenue bonds are payable primarily from the revenues
derived from mortgage loans to housing projects for low to moderate income
families. Single-family mortgage revenue bonds are issued for the purpose of
acquiring from originating financial institutions notes secured by mortgages on
residences.
Housing obligations are not general obligations of the issuer although
certain obligations may be supported to some degree by Federal, state or local
housing subsidy programs. Budgetary constraints experienced by these programs
as well as the failure by a state or local housing issuer to satisfy the
qualifications required for coverage under these programs or any legal or
administrative determinations that the coverage of these programs is not
available to a housing issuer, probably will result in a decrease or
elimination of subsidies available for payment of amounts due on the issuer's
obligations. The ability of housing issuers to make debt service payments on
their obligations will also be affected by various economic and non-economic
developments including, among other things, the achievement and maintenance of
sufficient occupancy levels and adequate rental income in multi-family
projects, the rate of default on mortgage loans underlying single family issues
and the ability of mortgage insurers to pay claims, employment and income
conditions prevailing in local markets, increases in construction costs, taxes,
utility costs and other operating expenses, the managerial ability of project
managers, changes in laws and governmental regulations and economic trends
generally in the localities in which the projects are situated. Occupancy of
multi-family housing projects may also be adversely affected by high rent
levels and income limitations imposed under Federal, state or local programs.
All single family mortgage revenue bonds and certain multi-family housing
revenue bonds are prepayable over the life of the underlying mortgage or
mortgage pool, and therefore the average life of housing obligations cannot be
determined. However, the average
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life of these obligations will ordinarily be less than their stated maturities.
Single-family issues are subject to mandatory redemption in whole or in part
from prepayments on underlying mortgage loans; mortgage loans are frequently
partially or completely prepaid prior to their final stated maturities as a
result of events such as declining interest rates, sale of the mortgaged
premises, default, condemnation or casualty loss. Multi-family issues are
characterized by mandatory redemption at par upon the occurrence of monetary
defaults or breaches or covenants by the project operator. Additionally,
housing obligations are generally subject to mandatory partial redemption at
par to the extent that proceeds from the sale of the obligations are not
allocated within a stated period (which may be within a year of the date of
issue). To the extent that these obligations were valued at a premium when a
Holder purchased Units, any prepayment at par would result in a loss of capital
to the Holder and, in any event, reduce the amount of income that would
otherwise have been paid to Holders.
The tax exemption for certain housing revenue bonds depends on qualification
under Section 143 of the Internal Revenue Code of 1986, as amended (the
"Code"), in the case of single family mortgage revenue bonds or Section
142(a)(7) of the Code or other provisions of Federal law in the case of certain
multi-family housing revenue bonds (including Section 8 assisted bonds). These
sections of the Code or other provisions of Federal law contain certain ongoing
requirements, including requirements relating to the cost and location of the
residences financed with the proceeds of the single family mortgage revenue
bonds and the income levels of tenants of the rental projects financed with the
proceeds of the multi-family housing revenue bonds. While the issuers of the
bonds and other parties, including the originators and servicers of the single-
family mortgages and the owners of the rental projects financed with the multi-
family housing revenue bonds, generally covenant to meet these ongoing
requirements and generally agree to institute procedures designed to ensure
that these requirements are met, there can be no assurance that these ongoing
requirements will be consistently met. The failure to meet these requirements
could cause the interest on the bonds to become taxable, possibly retroactively
from the date of issuance, thereby reducing the value of the bonds, subjecting
the Holders to unanticipated tax liabilities and possibly requiring the Trustee
to sell the bonds at reduced values. Furthermore, any failure to meet these
ongoing requirements might not constitute an event of default under the
applicable mortgage or permit the holder to accelerate payment of the bond or
require the issuer to redeem the bond. In any event, where the mortgage is
insured by the Federal Housing Administration, its consent may be required
before insurance proceeds would become payable to redeem the mortgage bonds.
POWER FACILITY BONDS. The ability of utilities to meet their obligations with
respect to revenue bonds issued on their behalf is dependent on various
factors, including the rates they may charge their customers, the demand for a
utility's services and the cost of providing those services. Utilities, in
particular investor-owned utilities, are subject to extensive regulations
relating to the rates which they may charge customers. Utilities can experience
regulatory, political and consumer resistance to rate increases. Utilities
engaged in long-term capital projects are especially sensitive to regulatory
lags in granting rate increases. Any difficulty in obtaining timely and
adequate rate increases could adversely affect a utility's results of
operations.
The demand for a utility's services is influenced by, among other factors,
competition, weather conditions and economic conditions. Electric utilities,
for example, have experienced increased competition as a result of the
availability of other energy sources, the effects of conservation on the use of
electricity, self-generation by industrial customers and the generation of
electricity by co-generators and other independent power producers. Also,
increased competition will result if federal regulators determine that
utilities must open their transmission lines to competitors. Utilities which
distribute natural gas also are subject to competition from alternative fuels,
including fuel oil, propane and coal.
The utility industry is an increasing cost business making the cost of
generating electricity more expensive and heightening its sensitivity to
regulation. A utility's costs are influenced by the utility's cost of capital,
the availability and cost of fuel and other factors. In addition, natural gas
pipeline and distribution companies have incurred increased costs as a result
of long-term natural gas purchase contracts containing "take or pay" provisions
which require that they pay for natural gas even if natural gas is not taken by
them. There can be no assurance that a utility will be able to pass on these
increased costs to customers through increased rates. Utilities incur
substantial capital expenditures for plant and equipment. In the future they
will also incur increasing capital and operating expenses to comply with
environmental legislation such as the Clean Air Act of 1990, and other energy,
licensing and other laws and regulations relating to, among other things, air
emissions, the quality of drinking water, waste water discharge, solid and
hazardous substance handling and disposal, and siting and licensing of
facilities. Environmental legislation and regulations are changing rapidly and
are the subject of current public policy debate and legislative proposals. It
is increasingly likely that some or many utilities will be subject to more
stringent environmental standards in the future that could result in
significant capital expenditures. Future legislation and regulation could
include, among other things, regulation of so-called electromagnetic fields
associated with electric transmission and distribution lines as well as
emissions of carbon dioxide and other so-called greenhouse gases associated
with the burning of fossil fuels. Compliance with these requirements may limit
a utility's operations or require substantial investments in new equipment and,
as a result, may adversely affect a utility's results of operations.
The electric utility industry in general is subject to various external
factors including (a) the effects of inflation upon the costs of operation and
construction, (b) substantially increased capital outlays and longer
construction periods for larger and more complex new
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generating units, (c) uncertainties in predicting future load requirements, (d)
increased financing requirements coupled with limited availability of capital,
(e) exposure to cancellation and penalty charges on new generating units under
construction, (f) problems of cost and availability of fuel, (g) compliance
with rapidly changing and complex environmental, safety and licensing
requirements, (h) litigation and proposed legislation designed to delay or
prevent construction of generating and other facilities, (i) the uncertain
effects of conservation on the use of electric energy, (j) uncertainties
associated with the development of a national energy policy, (k) regulatory,
political and consumer resistance to rate increases and (l) increased
competition as a result of the availability of other energy sources. These
factors may delay the construction and increase the cost of new facilities,
limit the use of, or necessitate costly modifications to, existing facilities,
impair the access of electric utilities to credit markets, or substantially
increase the cost of credit for electric generating facilities. The Sponsors
cannot predict at this time the ultimate effect of such factors on the ability
of any issuers to meet their obligations with respect to Bonds.
The National Energy Policy Act ("NEPA"), which became law in October, 1992,
makes it mandatory for a utility to permit non-utility generators of
electricity access to its transmission system for wholesale customers, thereby
increasing competition for electric utilities. NEPA also mandated demand-side
management policies to be considered by utilities. NEPA prohibits the Federal
Energy Regulatory Commission from mandating electric utilities to engage in
retail wheeling, which is competition among suppliers of electric generation to
provide electricity to retail customers (particularly industrial retail
customers) of a utility. However, under NEPA, a state can mandate retail
wheeling under certain conditions.
There is concern by the public, the scientific community, and the U.S.
Congress regarding environmental damage resulting from the use of fossil fuels.
Congressional support for the increased regulation of air, water, and soil
contaminants is building and there are a number of pending or recently enacted
legislative proposals which may affect the electric utility industry. In
particular, on November 15, 1990, legislation was signed into law that
substantially revises the Clean Air Act (the "1990 Amendments"). The 1990
Amendments seek to improve the ambient air quality throughout the United States
by the year 2000. A main feature of the 1990 Amendments is the reduction of
sulphur dioxide and nitrogen oxide emissions caused by electric utility power
plants, particularly those fueled by coal. Under the 1990 Amendments the U.S.
Environmental Protection Agency ("EPA") must develop limits for nitrogen oxide
emissions by 1993. The sulphur dioxide reduction will be achieved in two
phases. Phase I addresses specific generating units named in the 1990
Amendments. In Phase II the total U.S. emissions will be capped at 8.9 million
tons by the year 2000. The 1990 Amendments contain provisions for allocating
allowances to power plants based on historical or calculated levels. An
allowance is defined as the authorization to emit one ton of sulphur dioxide.
The 1990 Amendments also provide for possible further regulation of toxic air
emissions from electric generating units pending the results of several federal
government studies to be conducted over the next three to four years with
respect to anticipated hazards to public health, available corrective
technologies, and mercury toxicity.
Electric utilities which own or operate nuclear power plants are exposed to
risks inherent in the nuclear industry. These risks include exposure to new
requirements resulting from extensive federal and state regulatory oversight,
public controversy, decomissioning costs, and spent fuel and radioactive waste
disposal issues. While nuclear power construction risks are no longer of
paramount concern, the emerging issue is radioactive waste disposal. In
addition, nuclear plants typically require substantial capital additions and
modifications throughout their operating lives to meet safety, environmental,
operational and regulatory requirements and to replace and upgrade various
plant systems. The high degree of regulatory monitoring and controls imposed on
nuclear plants could cause a plant to be out of service or on limited service
for long periods. When a nuclear facility owned by an investor-owned utility or
a state or local municipality is out of service or operating on a limited
service basis, the utility operator or its owners may be liable for the
recovery of replacement power costs. Risks of substantial liability also arise
from the operation of nuclear facilities and from the use, handling, and
possible radioactive emissions associated with nuclear fuel. Insurance may not
cover all types or amounts of loss which may be experienced in connection with
the ownership and operation of a nuclear plant and severe financial
consequences could result from a significant accident or occurrence. The
Nuclear Regulatory Commission has promulgated regulations mandating the
establishment of funded reserves to assure financial capability for the
eventual decommissioning of licensed nuclear facilities. These funds are to be
accrued from revenues in amounts currently estimated to be sufficient to pay
for decommissioning costs.
The ability of state and local joint action power agencies to make payments
on bonds they have issued is dependent in large part on payments made to them
pursuant to power supply or similar agreements. Courts in Washington, Oregon
and Idaho have held that certain agreements between the Washington Public Power
Supply System ("WPPSS") and the WPPSS participants are unenforceable because
the participants did not have the authority to enter into the agreements. While
these decisions are not specifically applicable to agreements entered into by
public entities in other states, they may cause a reexamination of the legal
structure and economic viability of certain projects financed by joint power
agencies, which might exacerbate some of the problems referred to above and
possibly lead to legal proceedings questioning the enforceability of agreements
upon which payment of these bonds may depend.
WATER AND SEWER REVENUE BONDS. Water and sewer bonds are generally payable
from user fees. The ability of state and local water and sewer authorities to
meet their obligations may be affected by failure of municipalities to utilize
fully the facilities constructed by
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these authorities, economic or population decline and resulting decline in
revenue from user charges, rising construction and maintenance costs and delays
in construction of facilities, impact of environmental requirements, failure or
inability to raise user charges in response to increased costs, the difficulty
of obtaining or discovering new supplies of fresh water, the effect of
conservation programs and the impact of "no growth" zoning ordinances. In some
cases this ability may be affected by the continued availability of Federal and
state financial assistance and of municipal bond insurance for future bond
issues.
UNIVERSITY AND COLLEGE BONDS. The ability of universities and colleges to
meet their obligations is dependent upon various factors, including the size
and diversity of their sources of revenues, enrollment, reputation, management
expertise, the availability and restrictions on the use of endowments and other
funds, the quality and maintenance costs of campus facilities, and, in the case
of public institutions, the financial condition of the relevant state or other
governmental entity and its policies with respect to education. The
institution's ability to maintain enrollment levels will depend on such factors
as tuition costs, demographic trends, geographic location, geographic diversity
and quality of the student body, quality of the faculty and the diversity of
program offerings.
Legislative or regulatory action in the future at the Federal, state or local
level may directly or indirectly affect eligibility standards or reduce or
eliminate the availability of funds for certain types of student loans or grant
programs, including student aid, research grants and work-study programs, and
may affect indirect assistance for education.
LEASE RENTAL BONDS. Lease rental bonds are issued for the most part by
governmental authorities that have no taxing power or other means of directly
raising revenues. Rather, the authorities are financing vehicles created solely
for the construction of buildings (administrative offices, convention centers
and prisons, for example) or the purchase of equipment (police cars and
computer systems, for example) that will be used by a state or local government
(the "lessee"). Thus, the bonds are subject to the ability and willingness of
the lessee government to meet its lease rental payments which include debt
service on the bonds. Willingness to pay may be subject to changes in the views
of citizens and government officials as to the essential nature of the finance
project. Lease rental bonds are subject, in almost all cases, to the annual
appropriation risk, i.e., the lessee government is not legally obligated to
budget and appropriate for the rental payments beyond the current fiscal year.
These bonds are also subject to the risk of abatement in many states--rental
bonds cease in the event that damage, destruction or condemnation of the
project prevents its use by the lessee. (In these cases, insurance provisions
and reserve funds designed to alleviate this risk become important credit
factors). In the event of default by the lessee government, there may be
significant legal and/or practical difficulties involved in the reletting or
sale of the project. Some of these issues, particularly those for equipment
purchase, contain the so-called "substitution safeguard", which bars the lessee
government, in the event it defaults on its rental payments, from the purchase
or use of similar equipment for a certain period of time. This safeguard is
designed to insure that the lessee government will appropriate the necessary
funds even though it is not legally obligated to do so, but its legality
remains untested in most, if not all, states.
CAPITAL IMPROVEMENT FACILITY BONDS. The Portfolio of a Trust may contain
Bonds which are in the capital improvement facilities category. Capital
improvement bonds are bonds issued to provide funds to assist political
subdivisions or agencies of a state through acquisition of the underlying debt
of a state or local political subdivision or agency which bonds are secured by
the proceeds of the sale of the bonds, proceeds from investments and the
indebtedness of a local political subdivision or agency. The risks of an
investment in such bonds include the risk of possible prepayment or failure of
payment of proceeds on and default of the underlying debt.
SOLID WASTE DISPOSAL BONDS. Bonds issued for solid water disposal facilities
are generally payable from tipping fees and from revenues that may be earned by
the facility on the sale of electrical energy generated in the combustion of
waste products. The ability of solid waste disposal facilities to meet their
obligations depends upon the continued use of the facility, the successful and
efficient operation of the facility and, in the case of waste-to-energy
facilities, the continued ability of the facility to generate electricity on a
commercial basis. All of these factors may be affected by a failure of
municipalities to fully utilize the facilities, an insufficient supply of waste
for disposal due to economic or population decline, rising construction and
maintenance costs, any delays in construction of facilities, lower-cost
alternative modes of waste processing and changes in environmental regulations.
Because of the relatively short history of this type of financing, there may be
technological risks involved in the satisfactory construction or operation of
the projects exceeding those associated with most municipal enterprise
projects. Increasing environmental regulation on the federal, state and local
level has a significant impact on waste disposal facilities. While regulation
requires more waste producers to use waste disposal facilities, it also imposes
significant costs on the facilities. These costs include compliance with
frequently changing and complex regulatory requirements, the cost of obtaining
construction and operating permits, the cost of conforming to prescribed and
changing equipment standards and required methods of operation and, for
incinerators or waste-to-energy facilities, the cost of disposing of the waste
residue that remains after the disposal process in an environmentally safe
manner. In addition, waste disposal facilities frequently face substantial
opposition by environmental groups and officials to their location and
operation, to the possible adverse effects upon the public health and the
environment that may be caused by wastes disposed of at the facilities and to
alleged improper operating procedures. Waste disposal facilities benefit from
laws which require waste to be disposed of in a certain manner but any
relaxation of these laws could cause a decline in demand for the facilities'
services. Finally, waste-to-energy facilities are concerned with many of the
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same issues facing utilities insofar as they derive revenues from the sale of
energy to local power utilities (see Power Facility Bonds above).
MORAL OBLIGATION BONDS. The Trust may also include "moral obligation" bonds.
If an issuer of moral obligation bonds is unable to meet its obligations, the
repayment of the bonds becomes a moral commitment but not a legal obligation of
the state or municipality in question. Even though the state may be called on
to restore any deficits in capital reserve funds of the agencies or authorities
which issued the bonds, any restoration generally requires appropriation by the
state legislature and accordingly does not constitute a legally enforceable
obligation or debt of the state. The agencies or authorities generally have no
taxing power.
REFUNDED BONDS. Refunded Bonds are typically secured by direct obligations of
the U.S. Government, or in some cases obligations guaranteed by the U.S.
Government, placed in an escrow account maintained by an independent trustee
until maturity or a predetermined redemption date. These obligations are
generally noncallable prior to maturity or the predetermined redemption date.
In a few isolated instances to date, however, bonds which were thought to be
escrowed to maturity have been called for redemption prior to maturity.
AIRPORT, PORT AND HIGHWAY REVENUE BONDS. Certain facility revenue bonds are
payable from and secured by the revenues from the ownership and operation of
particular facilities, such as airports (including airport terminals and
maintenance facilities), bridges, marine terminals, turnpikes and port
authorities. For example, the major portion of gross airport operating income
is generally derived from fees received from signatory airlines pursuant to use
agreements which consist of annual payments for airport use, occupancy of
certain terminal space, facilities, service fees, concessions and leases.
Airport operating income may therefore be affected by the ability of the
airlines to meet their obligations under the use agreements. The air transport
industry is experiencing significant variations in earnings and traffic, due to
increased competition, excess capacity, increased aviation fuel, deregulation,
traffic constraints, the current recession and other factors. As a result,
several airlines are experiencing severe financial difficulties. Several
airlines including America West Airlines have sought protection from their
creditors under Chapter 11 of the Bankruptcy Code. In addition, other airlines
such as Midway Airlines, Inc., Eastern Airlines, Inc. and Pan American
Corporation have been liquidated. However, within the past few months Northwest
Airlines, Continental Airlines and Trans World Airlines have emerged from
bankruptcy. The Sponsors cannot predict what effect these industry conditions
may have on airport revenues which are dependent for payment on the financial
condition of the airlines and their usage of the particular airport facility.
Similarly, payment on bonds related to other facilities is dependent on
revenues from the projects, such as use fees from ports, tolls on turnpikes and
bridges and rents from buildings. Therefore, payment may be adversely affected
by reduction in revenues due to such factors and increased cost of maintenance
or decreased use of a facility, lower cost of alternative modes of
transportation or scarcity of fuel and reduction or loss of rents.
SPECIAL TAX BONDS. Special tax bonds are payable from and secured by the
revenues derived by a municipality from a particular tax such as a tax on the
rental of a hotel room, on the purchase of food and beverages, on the rental of
automobiles or on the consumption of liquor. Special tax bonds are not secured
by the general tax revenues of the municipality, and they do not represent
general obligations of the municipality. Therefore, payment on special tax
bonds may not be adversely affected by a reduction in revenues realized from
the underlying special tax due to a general decline in the local economy or
population or due to a decline in the consumption, use or cost of the goods and
services that are subject to taxation. Also, should spending on the particular
goods or services that are subject to the special tax decline, the municipality
may be under no obligation to increase the rate of the special tax to ensure
that sufficient revenues are raised from the shrinking taxable base.
TAX ALLOCATION BONDS. Tax allocation bonds are typically secured by
incremental tax revenues collected on property within the areas where
redevelopment projects, financed by bond proceeds are located ("project
areas"). Such payments are expected to be made from projected increases in tax
revenues derived from higher assessed values of property resulting from
development in the particular project area and not from an increase in tax
rates. Special risk considerations include: reduction of, or a less than
anticipated increase in, taxable values of property in the project area, caused
either by economic factors beyond the Issuer's control (such as a relocation
out of the project area by one or more major property owners) or by destruction
of property due to natural or other disasters; successful appeals by property
owners of assessed valuations; substantial delinquencies in the payment of
property taxes; or imposition of any constitutional or legislative property tax
rate decrease.
TRANSIT AUTHORITY BONDS. Mass transit is generally not self-supporting from
fare revenues. Therefore, additional financial resources must be made available
to ensure operation of mass transit systems as well as the timely payment of
debt service. Often such financial resources include Federal and state
subsidies, lease rentals paid by funds of the state or local government or a
pledge of a special tax such as a sales tax or a property tax. If fare revenues
or the additional financial resources do not increase appropriately to pay for
rising operating expenses, the ability of the issuer to adequately service the
debt may be adversely affected.
CONVENTION FACILITY BONDS. The Portfolio of a Trust may contain Bonds of
issuers in the convention facilities category. Bonds in the convention
facilities category include special limited obligation securities issued to
finance convention and sports facilities payable from rental payments and
annual governmental appropriations. The governmental agency is not obligated to
make payments in any year in
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which the monies have not been appropriated to make such payments. In addition,
these facilities are limited use facilities that may not be used for purposes
other than as convention centers or sports facilities.
PUERTO RICO. The Portfolio may contain bonds of issuers which will be
affected by general economic conditions in Puerto Rico. Puerto Rico's
unemployment rate remains significantly higher than the U.S. unemployment rate.
Furthermore, the economy is largely dependent for its development upon U.S.
policies and programs that are being reviewed and may be eliminated.
The Puerto Rican economy is affected by a number of Commonwealth and Federal
investment incentive programs. For example, Section 936 of the Internal Revenue
Code (the "Code") provides for a credit against Federal income taxes for U.S.
companies operating on the island if certain requirements are met. The Omnibus
Budget Reconciliation Act of 1993 imposes limits on such credit, effective for
tax years beginning after 1993. In addition, from time to time proposals are
introduced in Congress which, if enacted into law, would eliminate some or all
of the benefits of Section 936. Although no assessment can be made at this time
of the precise effect of such limitation, it is expected that the limitation of
Section 936 credits would have a negative impact on Puerto Rico's economy.
Aid for Puerto Rico's economy has traditionally depended heavily on Federal
programs, and current Federal budgetary policies suggest that an expansion of
aid to Puerto Rico is unlikely. An adverse effect on the Puerto Rican economy
could result from other U.S. policies, including a reduction of tax benefits
for distilled products, further reduction in transfer payment programs such as
food stamps, curtailment of military spending and policies which could lead to
a stronger dollar.
In a plebiscite held in November, 1993, the Puerto Rican electorate chose to
continue Puerto Rico's Commonwealth status. Previously proposed legislation,
which was not enacted, would have preserved the federal tax exempt status of
the outstanding debts of Puerto Rico and its public corporations regardless of
the outcome of the referendum, to the extent that similar obligations issued by
states are so treated and subject to the provisions of the Code currently in
effect. There can be no assurance that any pending or future legislation
finally enacted will include the same or similar protection against loss of tax
exemption. The November 1993 plebiscite can be expected to have both direct and
indirect consequences on such matters as the basic characteristics of future
Puerto Rico debt obligations, the markets for these obligations, and the types,
levels and quality of revenue sources pledged for the payment of existing and
future debt obligations. Such possible consequences include, without
limitation, legislative proposals seeking restoration of the status of Section
936 benefits otherwise subject to the limitations discussed above. However, no
assessment can be made at this time of the economic and other effects of a
change in federal laws affecting Puerto Rico as a result of the November 1993
plebiscite.
LITIGATION AND LEGISLATION. To the best knowledge of the Sponsors, there is
no litigation pending as of the Initial Date in respect of any Bonds which
might reasonably be expected to have a material adverse effect upon the Trust.
At any time after the Initial Date of Deposit, litigation may be initiated on a
variety of grounds, or legislation may be enacted, with respect to Bonds in the
Trust. Litigation, for example, challenging the issuance of pollution control
revenue bonds under environmental protection statutes may affect the validity
of Bonds or the tax-free nature of their interest. While the outcome of
litigation of this nature can never be entirely predicted, opinions of bond
counsel are delivered on the date of issuance of each Bond to the effect that
the Bond has been validly issued and that the interest thereon is exempt from
Federal income tax. In addition, other factors may arise from time to time
which potentially may impair the ability of issuers to make payments due on the
Bonds.
Under the Federal Bankruptcy Act, a political subdivision or public agency or
instrumentality of any state, including municipalities, may proceed to
restructure or otherwise alter the terms of its obligations, including those of
the type comprising the Trust's Portfolio. The Sponsors are unable to predict
what effect, if any, this legislation might have on the Trust.
From time to time Congress considers proposals to tax the interest on state
and local obligations, such as the Bonds. The Supreme Court clarified in South
Carolina v. Baker (decided April 20, 1988) that the U.S. Constitution does not
prohibit Congress from passing a nondiscriminatory tax on interest on state and
local obligations. This type of legislation, if enacted into law, could
adversely affect an investment in Units. Holders are urged to consult their own
tax advisers.
TAX EXEMPTION. In the opinion of bond counsel rendered on the date of
issuance of each Bond, the interest on each Bond is excludable from gross
income under existing law for regular Federal income tax purposes (except in
certain circumstances depending on the Holder) but may be subject to state and
local taxes. As discussed under Taxes below, interest on some or all of the
Bonds may become subject to regular Federal income tax, perhaps retroactively
to their date of issuance, as a result of changes in Federal law or as a result
of the failure of issuers (or other users of the proceeds of the Bonds) to
comply with certain ongoing requirements.
Moreover, the Internal Revenue Service announced on June 14, 1993 that it
will be expanding its examination program with respect to tax-exempt bonds. The
expanded examination program will consist of, among other measures, increased
enforcement against abusive transactions, broader audit coverage (including the
expected issuance of audit guidelines) and expanded compliance achieved by
means of expected revisions to the tax-exempt bond information return forms. At
this time, it is uncertain whether the tax exempt status of any of the Bonds
would be affected by such proceedings, or whether such effect, if any, would be
retroactive.
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In certain cases, a Bond may provide that if the interest on the Bond should
ultimately be determined to be taxable, the Bond would become due and payable
by its issuer, and, in addition, may provide that any related letter of credit
or other security could be called upon if the issuer failed to satisfy all or
part of its obligation. In other cases, however, a Bond may not provide for the
acceleration or redemption of the Bond or a call upon the related letter of
credit or other security upon a determination of taxability. In those cases in
which a Bond does not provide for acceleration or redemption or in which both
the issuer and the bank or other entity issuing the letter of credit or other
security are unable to meet their obligations to pay the amounts due on the
Bond as a result of a determination of taxability, the Trustee would be
obligated to sell the Bond and, since it would be sold as a taxable security,
it is expected that it would have to be sold at a substantial discount from
current market price. In addition, as mentioned above, under certain
circumstances Holders could be required to pay income tax on interest received
prior to the date on which the interest is determined to be taxable.
THE UNITS
On the Date of Deposit, each Unit in a Trust represented a fractional
undivided interest in the principal and net income of such Trust as is set
forth in Part A, "Summary of Essential Information."
If any Units are redeemed after the date of this Prospectus by the Trustee,
the principal amount of Bonds in the affected Trust will be reduced by an
amount allocable to redeemed Units and the fractional undivided interest in the
affected Trust represented by each unredeemed Unit will be increased. Units
will remain outstanding until redeemed upon tender to the Trustee by any Unit
holder, which may include the Sponsors, or until the termination of the Trust
Agreement. (See "Amendment and Termination of the Trust Agreement--
Termination.")
TAXES
The following discussion addresses only the tax consequences of Units held as
capital assets and does not address the tax consequences of Units held by
dealers, financial institutions or insurance companies.
In the opinion of Davis Polk & Wardwell, special counsel for the Sponsors,
under existing law:
The Trusts are not associations taxable as corporations for Federal
income tax purposes, and income received by the Trusts will be treated as
the income of the Unit holders ("Holders") in the manner set forth below.
Each Holder of Units of a Trust will be considered the owner of a pro
rata portion of each Bond in the Trust under the grantor trust rules of
Sections 671-679 of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to determine the face amount of a Holder's pro rata
portion of each Bond on the Date of Deposit, see "Aggregate Principal"
under "Portfolio of Securities". The total cost to a Holder of his Units,
including sales charges, is allocated to his pro rata portion of each Bond,
in proportion to the fair market values thereof on the date the Holder
purchases his Units, in order to determine his tax cost for his pro rata
portion of each Bond. In order for a Holder who purchases his Units on the
Date of Deposit to determine the fair market value of his pro rata portion
of each Bond on such date, see "Cost of Securities to Trust" under
"Portfolio of Securities".
Each Holder of Units of a Trust will be considered to have received the
interest on his pro rata portion of each Bond when interest on the Bond is
received by the Trust. In the opinion of bond counsel (delivered on the
date of issuance of each Bond), such interest will be excludable from gross
income for regular Federal income tax purposes (except in certain limited
circumstances referred to below). Amounts received by a Trust pursuant to a
bank letter of credit, guarantee or insurance policy with respect to
payments of principal, premium or interest on a Bond in the Trust will be
treated for Federal income tax purposes in the same manner as if such
amounts were paid by the issuer of the Bond.
The Trusts may contain Bonds which were originally issued at a discount
("original issue discount"). The following principles will apply to each
Holder's pro rata portion of any Bond originally issued at a discount. In
general, original issue discount is defined as the difference between the
price at which a debt obligation was issued and its stated redemption price
at maturity. Original issue discount on a tax-exempt obligation issued
after September 3, 1982, is deemed to accrue as tax-exempt interest over
the life of the obligation under a formula based on the compounding of
interest. Original issue discount on a tax-exempt obligation issued before
July 2, 1982 is deemed to accrue as tax-exempt interest ratably over the
life of the obligation. Original issue discount on any tax-exempt
obligation issued during the period beginning July 2, 1982 and ending
September 3, 1982 is also deemed to accrue as tax-exempt interest over the
life of the obligation, although it is not clear whether such accrual is
ratable or is determined under a formula based on the compounding of
interest. If a Holder's tax cost for his pro rata portion of a Bond issued
with original issue discount is greater than its "adjusted issue price" but
less than its stated redemption price at maturity (as may be adjusted for
certain payments), the Holder will be considered to have purchased his pro
rata portion of the Bond at an "acquisition premium." A Holder's adjusted
tax basis for his pro rata portion of a Bond issued with original issue
discount will include original issue discount
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accrued during the period such Holder held his Units. Such increases to the
Holder's tax basis in his pro rata portion of the Bond resulting from the
accrual of original issue discount, however, will be reduced by the amount
of any such acquisition premium.
If a Holder's tax basis for his pro rata portion of a Bond in the
Holder's Trust exceeds the redemption price at maturity thereof (subject to
certain adjustments), the Holder will be considered to have purchased his
pro rata portion of the Bond with "amortizable bond premium". The Holder is
required to amortize such bond premium over the term of the Bond. Such
amortization is only a reduction of basis for his pro rata portion of the
Bond and does not result in any deduction against the Holder's income.
Therefore, under some circumstances, a Holder may recognize taxable gain
when his pro rata portion of a Bond is disposed of for an amount equal to
or less than his original tax basis therefor.
A Holder will recognize taxable gain or loss when all or part of his pro
rata portion of a Bond in his Trust is disposed of by the Trust for an
amount greater or less than his adjusted tax basis. Any such taxable gain
or loss will be capital gain or loss, except that any gain from the
disposition of a Holder's pro rata portion of a Bond acquired by the Holder
at a "market discount" (i.e., where the Holder's original basis for his pro
rata portion of the Bond (plus any original issue discount which will
accrue thereon until its maturity) is less than its stated redemption price
at maturity) would be treated as ordinary income to the extent the gain
does not exceed the accrued market discount. Capital gains are generally
taxed at the same rate as ordinary income. However, the excess of net long-
term capital gains over net short-term capital losses may be taxed at a
lower rate than ordinary income for certain noncorporate taxpayers. A
capital gain or loss is long-term if the asset is held for more than one
year and short-term if held for one year or less. The deduction of capital
losses is subject to limitations. A Holder will also be considered to have
disposed of all or part of his pro rata portion of each Bond when he sells
or redeems all or some of his Units.
Under the income tax laws of the State and City of New York, the Trust is
not an association taxable as a corporation and income received by each
Trust will be treated as the income of the Holders in the same manner as
for Federal income tax purposes, but will not necessarily be tax-exempt.
Under Section 265 of the Code, a Holder (except a corporate Holder) is
not entitled to a deduction for his pro rata share of fees and expenses of
a Trust because the fees and expenses are incurred in connection with the
production of tax-exempt income. Further, if borrowed funds are used by a
Holder to purchase or carry Units of any Trust, interest on such
indebtedness will not be deductible for Federal income tax purposes. In
addition, under rules used by the Internal Revenue Service, the purchase of
Units may be considered to have been made with borrowed funds even though
the borrowed funds are not directly traceable to the purchase of Units.
Similar rules may be applicable for state tax purposes.
From time to time proposals are introduced in Congress and state
legislatures which, if enacted into law, could have an adverse impact on
the tax-exempt status of the Bonds. It is impossible to predict whether any
legislation in respect of the tax status of interest on such obligations
may be proposed and eventually enacted at the Federal or state level.
The forgoing discussion relates only to Federal and certain aspects of
New York State and City income taxes. Depending on their state of
residence, Holders may be subject to state and local taxation and should
consult their own tax advisers in this regard.
* * * * *
Interest on certain tax-exempt bonds issued after August 7, 1986 will be a
preference item for purposes of the alternative minimum tax ("AMT"). The
Sponsors believe that interest (including any original issue discount) on the
Bonds should not be subject to the AMT for individuals or corporations under
this rule. A corporate Holder should be aware, however, that the accrual or
receipt of tax-exempt interest not subject to the AMT may give rise to an
alternative minimum tax liability (or increase an existing liability) because
the interest income will be included in the corporation's "adjusted current
earnings" for purposes of the adjustment to alternative minimum taxable income
required by Section 56(g) of the Code and will be taken into account for
purposes of the environmental tax on corporations under Section 59A of the
Code, which is based on an alternative minimum taxable income.
In addition, interest on the Bonds must be taken into consideration in
computing the portion, if any, of social security benefits that will be
included in an individual's gross income and subject to Federal income tax.
Holders are urged to consult their own tax advisers concerning an investment in
Units.
At the time of issuance of each Bond, an opinion relating to the validity of
the Bond and to the exemption of interest thereon from regular Federal income
taxes was or will be rendered by bond counsel. Neither the Sponsors nor Davis
Polk & Wardwell have made or will make any review of the proceedings relating
to the issuance of the Bonds or the basis for these opinions. The tax exemption
is dependent upon the issuer's (and other users') compliance with certain
ongoing requirements, and the opinion of bond counsel assumes that these
requirements will be complied with. However, there can be no assurance that the
issuer (and other users) will comply with these requirements, in which event
the interest on the Bond could be determined to be taxable retroactively from
the date of issuance.
In the case of certain of the Bonds, the opinions of bond counsel indicate
that interest on such Bonds received by a "substantial user" of the facilities
being financed with the proceeds of such Bonds, or persons related thereto, for
periods while such Bonds are held
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by such a user or related person, will not be exempt from regular Federal
income taxes, although interest on such Bonds received by others would be
exempt from regular Federal income taxes. "Substantial user" is defined under
U.S. Treasury Regulations to include only a person from regular Federal income
taxes. "Substantial user" is defined under U.S. Treasury Regulations to include
only a person whose gross revenue derived with respect to the facilities
financed by the issuance of bonds is more than 5% of the total revenue derived
by all users of such facilities, or who occupies more than 5% of the usable
area of such facilities or for whom such facilities or a part thereof were
specifically constructed, reconstructed or acquired. "Related persons" are
defined to include certain related natural persons, affiliated corporations,
partners and partnerships. Similar rules may be applicable for state tax
purposes.
After the end of each calendar year, the Trustee will furnish to each Holder
an annual statement containing information relating to the interest received by
the Trust on the Bonds, the gross proceeds received by the Trust from the
disposition of any Bond (resulting from redemption or payment at maturity of
any Bond or the sale by the Trust of any Bond), and the fees and expenses paid
by the Trust. The Trustee will also furnish annual information returns to each
Holder and to the Internal Revenue Service. Holders are required to report to
the Internal Revenue Service the amount of tax-exempt interest received during
the year.
EXPENSES AND CHARGES
Initial Expenses
At no cost to a Trust the Sponsors have borne all the expenses of creating
and establishing the Trust, including the cost of the initial preparation and
execution of the Trust Agreement, initial preparation and printing of the
certificates for Units, the fees of the Evaluator during the initial public
offering, legal expenses, advertising and selling expenses and other out-of-
pocket expenses.
Trustee's, Sponsors' and Evaluator's Fees
The Trustee will receive for its ordinary recurring services to a Trust an
annual fee in the amount set forth under Part A, "Summary of Essential
Information." For a discussion of the services performed by the Trustee
pursuant to its obligations under the Trust Agreement, see "Rights of Unit
Holders." The Trustee will receive the benefit of any reasonable cash balances
in the Income and Principal Accounts.
The Portfolio supervision fee (the "Supervision Fee") which is earned for
Portfolio supervisory services is based upon the greatest face amount of Bonds
in the Trust at any time during the calendar year with respect to which the fee
is being computed.
The Supervision Fee, which is not to exceed the amount set forth in Part A--
"Summary of Essential Information", may exceed the actual costs of providing
Portfolio supervisory services for such Trust, but at no time will the total
amount the Sponsors receive for Portfolio supervisory services rendered to all
series of Tax Exempt Securities Trust in any calendar year exceed the aggregate
cost to them of supplying such services in such year. In addition, the Sponsors
may also be reimbursed for bookkeeping and other administrative services
provided to the Trust in amounts not exceeding their costs of providing these
services.
The Evaluator will receive a fee in the amount set forth under Part A,
"Summary of Essential Information," for each evaluation of the Bonds in a
Trust. For a discussion of the services performed by the Evaluator pursuant to
its obligations under the Trust Agreement, see "Evaluator--Responsibility" and
"Public Offering--Offering Price."
Any of such fees may be increased without approval of the Unit holders by
amounts not exceeding proportionate increases in consumer prices for services
as measured by the United States Department of Labor's Consumer Price Index
entitled "All Services Less Rent" or, if such Index is no longer published, in
a similar Index to be determined by the Trustee and the Sponsors.
Other Charges
The following additional charges are or may be incurred by a Trust: all
expenses of the Trustee (including fees and expenses of counsel and auditors)
incurred in connection with its activities under the Trust Agreement, including
reports and communications to Unit holders; expenses and costs of any action
undertaken by the Trustee to protect a Trust and the rights and interests of
the Unit holders; fees of the Trustee for any extraordinary services performed
under the Trust Agreement; indemnification of the Trustee for any loss or
liability accruing to it without gross negligence, bad faith or willful
misconduct on its part, arising out of or in connection with its acceptance or
administration of a Trust; to the extent lawful, expenses (including legal,
accounting and printing expenses) of maintaining registration or qualification
of the Units and/or a Trust under Federal or state securities laws subsequent
to initial registration so long as the Sponsors are maintaining a market for
the Units and all taxes and other governmental charges imposed upon the Bonds
or any part of a Trust (no such taxes or charges are being levied or made or,
to the knowledge of the Sponsors, contemplated). The above expenses, including
the Trustee's fee, when paid by or owing to the Trustee, are secured by a lien
on the Trust. In addition, the Trustee is empowered to sell Bonds in order to
make funds available to pay all expenses.
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PUBLIC OFFERING
OFFERING PRICE
During the initial public offering period, the Public Offering Price of the
Units of a Trust is determined by adding to the Evaluator's determination of
the aggregate OFFERING price of the Bonds per Unit a sales charge equal to a
percentage of the Public Offering Price of the Units of the Trust, as set forth
in the table below. After the initial public offering period, the Public
Offering Price of the Units of a Trust will be determined by adding to the
Evaluator's determination of the aggregate BID price of the Bonds per Unit a
sales charge equal to 5.00% of the Public Offering Price (5.263% of the
aggregate bid price of the Bonds per Unit) for a Trust whose Units had a sales
charge (prior to any reduction) during the initial offering period of 4.70%. A
proportionate share of accrued and undistributed interest on the Bonds in a
Trust at the date of delivery of the Units of such Trust to the purchaser is
also added to the Public Offering Price. (See "Rights of Unit Holders--
Distribution of Interest and Principal.")
During the initial public offering period, the sales charge and dealer
concession for a Trust will be reduced pursuant to the following scales (see
Part A, "The Public Offering Price" for the unreduced sales charge to determine
the applicable table):
<TABLE>
<CAPTION>
------------------------------------
PERCENT OF PERCENT OF
PUBLIC NET AMOUNT DEALER
UNITS PURCHASED+ OFFERING PRICE INVESTED CONCESSION
---------------- -------------- ---------- ----------
<S> <C> <C> <C>
1- 99......................... 4.70% 4.932% $33.00
100-249......................... 4.25% 4.439% $32.00
250-499......................... 4.00% 4.167% $30.00
500-999......................... 3.50% 3.627% $25.00
1,000 or more..................... 3.00% 3.093% $20.00
</TABLE>
The Sponsors may at any time change the amount by which the sales charge is
reduced, or discontinue the discount completely.
Pursuant to employee benefit plans, Units of a Trust are available to
employees of certain of the Sponsors, during the initial public offering
period, at a Public Offering Price equal to the Evaluator's determination of
the aggregate offering price of the Bonds of a Trust per Unit plus a sales
charge of 1.25% of the Public Offering Price and after the initial public
offering period, at a Public Offering Price equal to the Evaluator's
determination of the aggregate bid price of the Bonds of a Trust per Unit plus
a sales charge of 1.25% of the Public Offering Price. Sales through such plans
to employees of the Sponsors result in less selling effort and selling expenses
than sales to the general public.
METHOD OF EVALUATION
During the initial public offering period, the aggregate offering price of
the Bonds is determined by the Evaluator (1) on the basis of current offering
prices for the Bonds*, (2) if offering prices are not available for any Bonds,
on the basis of current offering prices for comparable securities, (3) by
appraisal, or (4) by any combination of the above. Such determinations are made
each business day as of the Evaluation Time set forth in the "Summary of
Essential Information," in Part A, effective for all sales made subsequent to
the last preceding determination. Following the initial public offering period,
the aggregate bid price of the Bonds (which is used to calculate the price at
which the Sponsors repurchase and sell Units in the secondary market and the
Redemption Price at which Units may be redeemed) will be determined by the
Evaluator (1) on the basis of the current bid prices for the Bonds*, (2) if bid
prices are not available for any Bonds, on the basis of current bid prices of
comparable securities, (3) by appraisal, or (4) by any combination of the
above. Such determinations will be made each business day as of the Evaluation
Time set forth in the "Summary of Essential Information," in Part A, effective
for all sales made subsequent to the last preceding determination. The term
"business day," as used herein shall exclude Saturdays, Sundays and any day on
which the New York Stock Exchange is closed. The difference between the bid and
offering prices of the Bonds may be expected to average approximately 1 1/2% of
principal amount. In the case of actively traded securities, the difference may
be as little as 1/2 of 1%, and in the case of inactively traded securities such
difference will usually not exceed 3%. The price at which Units may be
repurchased by the Sponsors in the secondary market could be less than the
price paid by the Unit holder. On the Date of Deposit for each Trust the
aggregate current offering price of such Bonds per Unit exceeded the bid price
of such Bonds per
- -------
+ The reduced sales charge is also applied on a dollar basis utilizing a
breakpoint equivalent in the above table of $1,000 for one Unit, etc.
* Current offering or bid prices of the Deposited Units, if any, are based on
prevailing weekly evaluations of the obligations underlying such Deposited
Units.
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Unit by the amounts set forth under "Summary of Essential Information" in Part
A. For information relating to the calculation of the Redemption Price per
Unit, which is also based upon the aggregate bid price of the underlying Bonds
and which may be expected to be less than the Public Offering Price per Unit,
see "Rights of Unit Holders--Redemption of Units."
DISTRIBUTION OF UNITS
During the initial public offering period Units of a Trust will be
distributed to the public at the Public Offering Price determined in the manner
provided above (see "Public Offering--Offering Price") through the Underwriters
and dealers. The initial public offering period is 30 days unless all Units of
a Trust are sold prior thereto, in which case the initial public offering
period terminates with the sale of all Units. So long as all Units initially
offered have not been sold, the Sponsors may extend the initial public offering
period for up to four additional successive 30-day periods. Upon completion of
the initial public offering, Units which remain unsold or which may be acquired
in the secondary market (see "Public Offering--Market for Units") may be
offered by this Prospectus at the Public Offering Price determined in the
manner provided above (see "Public Offering--Offering Price").
It is the Sponsors' intention to qualify Units of a Trust for sale in several
states through the Underwriters and dealers who are members of the National
Association of Securities Dealers, Inc. Units of a State Trust will not be
offered for sale in the State of Virginia. Units will initially be sold to
dealers at prices which represent a concession equal to the amount designated
in the tables under "Public Offering--Offering Price" herein, for a Trust with
an unreduced sales charge as specified in Part A--"The Public Offering Price."
The Sponsors reserve the right to change the amount of the concession to
dealers from time to time. After the initial offering period the dealer
concession is negotiated on a case-by-case basis.
Sales will be made only with respect to whole Units, and the Sponsors reserve
the right to reject, in whole or in part, any order for the purchase of Units.
A purchaser does not become a Unit holder (Certificate holder) or become
entitled to exercise the rights of a Unit holder (including the right to redeem
his Units) until he has paid for his Units. Generally, such payment must be
made within five business days after an order for the purchase of Units has
been placed. The price paid by a Unit holder is the Public Offering Price in
effect at the time his order is received, plus accrued interest (see "Public
Offering--Method of Evaluation"). This price may be different from the Public
Offering Price in effect on any other day, including the day on which he made
payment for the Units.
MARKET FOR UNITS
Following the initial public offering period the Sponsors, although not
obligated to do so, presently intend to maintain a market for the Units of a
Trust and continuously to offer to purchase such Units at prices based upon the
aggregate bid price of the underlying Bonds. For information relating to the
method and frequency of the Evaluator's determination of the aggregate bid
price of the underlying Bonds, see "Public Offering--Method of Evaluation." The
Sponsors may cease to maintain such a market at any time and from time to time
without notice if the supply of Units of a Trust of this Series exceeds demand
or for any other reason. In this event the Sponsors may nonetheless purchase
Units, as a service to Unit holders, at prices based on the current Redemption
Price of those Units. In the event that a market is not maintained for the
Units of a Trust, a Unit holder of such Trust desiring to dispose of his Units
may be able to do so only by tendering such Units to the Trustee for redemption
at the Redemption Price, which is based upon the aggregate bid price of the
underlying Bonds. The aggregate bid price of the underlying Bonds of a Trust
may be expected to be less than the aggregate offering price.
EXCHANGE OPTION
Unit holders may elect to exchange any or all of their Units of this series
for units of one or more of any series of Tax Exempt Securities Trust (the
"Exchange Trust") available for sale in the state in which the Unit holder
resides at a Public Offering Price for the units of the Exchange Trust to be
acquired based on a fixed sales charge of $25 per unit. The Sponsors reserve
the right to modify, suspend or terminate this plan at any time without further
notice to Unit holders. Therefore, there is no assurance that a market for
units will in fact exist on any given date on which a Unit holder wishes to
sell his Units of this series and thus there is no assurance that the Exchange
Option will be available to a Unit holder. Exchanges will be effected in whole
units ONLY. Any excess proceeds from Unit holders' Units being surrendered will
be returned and Unit holders will NOT be permitted to advance any new money in
order to complete an exchange.
An exchange of Units pursuant to the Exchange Option for units of an Exchange
Trust will generally constitute a "taxable event" under the Code, i.e., a
Holder will recognize a gain or loss at the time of exchange. However, an
exchange of Units of this Trust for units of any other series of the Tax Exempt
Securities Trust which are grantor trusts for U.S. Federal income tax purposes
will not constitute
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a taxable event to the extent that the underlying securities in each trust do
not differ materially either in kind or in extent. Unit holders are urged to
consult their own tax advisors as to the tax consequences to them of exchanging
Units in particular cases.
Units of the Exchange Trust will be sold under the Exchange Option at the bid
prices of the underlying securities in the particular portfolio involved per
unit plus a fixed charge of $25 per unit. As an example, assume that a Unit
holder, who has three units of a trust with a current price of $1,020 per unit
based on the bid prices of the underlying securities, desires to exchange his
Units for units of a series of an Exchange Trust with a current price of $880
per unit based on the bid prices of the underlying securities. In this example,
the proceeds from the Unit holder's units will aggregate $3,060. Since only
whole units of an Exchange Trust may be purchased under the Exchange Option,
the Unit holder would be able to acquire three units in the Exchange Trust for
a total cost of $2,715 ($2,640 for the units and $75 for the sales charge). The
remaining $345 would be returned to the Unit holder in cash.
REINVESTMENT PROGRAMS
Distributions of interest and principal, if any, are made to Unit holders
monthly. The Unit holder will have the option of either receiving his monthly
income check from the Trustee or participating in one of the reinvestment
programs offered by certain of the Sponsors provided such Unit holder meets the
minimum qualifications of the reinvestment program and such program lawfully
qualifies for sale in the jurisdiction in which the Unit holder resides. Upon
enrollment in a reinvestment program, the Trustee will direct monthly interest
distributions and principal distributions, if any, to the reinvestment program
selected by the Unit holder. Since each Sponsor has arranged for different
reinvestment alternatives, Unit holders should contact the Sponsors for more
complete information, including charges and expenses. The appropriate
prospectus will be sent to the Unit holder. The Unit holder should read the
prospectus for a reinvestment program carefully before deciding to participate.
Participation in the reinvestment program will apply to all Units of a Trust
owned by a Unit holder and may be terminated at any time by the Unit holder, or
the program may be modified or terminated by the Trustee or the program's
Sponsor.
SPONSORS' AND UNDERWRITERS' PROFITS
For their services the Underwriters (see Part A, "Underwriting") receive a
commission based on the sales charge of a particular Trust (see "Public
Offering--Offering Price") as adjusted pursuant to the Agreement Among
Underwriters. The Sponsors receive a gross commission equal to the applicable
sales charge for any Units they have underwritten, and receive the difference
between the applicable sales charge and the Underwriter's commission for the
remainder of the Units. In addition, the Sponsors may realize profits or
sustain losses, as the case may be, in the amount of any difference between the
cost of the Bonds to a Trust (which is based on the aggregate offering price of
the underlying Bonds on the Date of Deposit) and the purchase price of such
Bonds to the Sponsors (which is the cost of the Bonds at the time they were
acquired for the account of a Trust and the cost of the Deposited Units at the
time they were acquired by the Sponsors). (See Part A, "Portfolio of
Securities"--Note (3).) Under certain circumstances, an Underwriter may be
entitled to share in such profits, if any, realized by the Sponsors. A Sponsor
may also realize profits or sustain losses with respect to Bonds deposited in a
Trust which were acquired from its own organization or from underwriting
syndicates of which it was a member. During the initial public offering period
the Underwriters also may realize profits or sustain losses as a result of
fluctuations after the Date of Deposit in the offering prices of the Bonds and
hence in the Public Offering Price received by the Underwriters for Units.
Cash, if any, made available to the Sponsors prior to the anticipated first
settlement date for the purchase of Units may be used in the Sponsors'
businesses to the extent permitted by applicable regulations and may be of use
to the Sponsors.
In maintaining a market for the Units of a Trust (see "Public Offering--
Market for Units"), the Sponsors will also realize profits or sustain losses in
the amount of any difference between the price at which they buy such Units and
the price at which they resell or redeem such Units (see "Public Offering--
Offering Price").
RIGHTS OF UNIT HOLDERS
CERTIFICATES
Ownership of Units of a Trust is evidenced by registered certificates
executed by the Trustee and the Sponsors. Certificates are transferable by
presentation and surrender to the Trustee properly endorsed or accompanied by a
written instrument or instruments of transfer.
Certificates may be issued in denominations of one Unit or any multiple
thereof. A Unit holder may be required to pay $2.00 per certificate reissued or
transferred, and to pay any governmental charge that may be imposed in
connection with each such transfer or interchange. For new certificates issued
to replace destroyed, stolen or lost certificates, the Unit holder must furnish
indemnity
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satisfactory to the Trustee and must pay such expenses as the Trustee may
incur. Mutilated certificates must be surrendered to the Trustee for
replacement.
DISTRIBUTION OF INTEREST AND PRINCIPAL
Interest and principal received by a Trust will be distributed on each
monthly Distribution Date on a pro rata basis to Unit holders in such Trust of
record as of the preceding Record Date. All distributions will be net of
applicable expenses and funds required for the redemption of Units and, if
applicable, reimbursements to the Trustee for interest payments advanced to
Unit holders on previous Monthly Distribution Dates. (See Part A, "Summary of
Essential Information," "Tax Exempt Securities Trust--Expenses and Charges" and
"Rights of Unit Holders--Redemption of Units.")
The Trustee will credit to the Interest Account of a Trust all interest
received by such Trust, including that part of the proceeds of any disposition
of Bonds of such Trust which represents accrued interest. Other receipts will
be credited to the Principal Account of a Trust. The pro rata share of the
Interest Account and the pro rata share of cash in the Principal Account
represented by each Unit of a Trust will be computed by the Trustee each month
as of the Record Date. (See Part A, "Summary of Essential Information.")
Proceeds received from the disposition of any of the Bonds subsequent to a
Record Date and prior to the next succeeding Distribution Date will be held in
the Principal Account and will not be distributed until the following
Distribution Date. The distribution to the Unit holders as of each Record Date
will be made on the following Distribution Date or shortly thereafter and shall
consist of an amount substantially equal to one-twelfth of such holders' pro
rata share of the estimated annual income to the Interest Account after
deducting estimated expenses (the "Monthly Income Distribution") plus such
holders' pro rata share of the cash balance in the Principal Account computed
as of the close of business on the preceding Record Date. Persons who purchase
Units between a Record Date and a Distribution Date will receive their first
distribution on the second Distribution Date following their purchase of Units.
No distribution need be made from the Principal Account if the balance therein
is less than an amount sufficient to distribute $1.00 per Unit. The Monthly
Income Distribution per Unit initially will be in the amount shown under Part
A, "Summary of Essential Information" for a Trust and will change as the income
and expenses of such Trust change and as Bonds are exchanged, redeemed, paid or
sold.
Normally, interest on the Bonds in the Portfolio of a Trust is paid on a
semi-annual basis. Because Bond interest is not received by a Trust at a
constant rate throughout the year, any Monthly Income Distribution may be more
or less than the amount credited to the Interest Account as of the Record Date.
In order to eliminate fluctuations in Monthly Income Distributions resulting
from such variances, the Trustee is required by the Trust Agreement to advance
such amounts as may be necessary to provide Monthly Income Distributions of
approximately equal amounts. The Trustee will be reimbursed, without interest,
for any such advances from funds available from the Interest Account on the
next ensuing Record Date or Record Dates, as the case may be. If all or a
portion of the Bonds for which advances have been made subsequently fail to pay
interest when due, the Trustee may recoup advances made by it in anticipation
of receipt of interest payments on such Bonds by reducing the amount
distributed per Unit in one or more Monthly Interest Distributions. If units
are redeemed subsequent to such advances by the Trustee, but prior to receipt
by the Trustee of actual notice of such failure to pay interest, the amount of
which was so advanced by the Trustee, each remaining Unit holder will be
subject to a greater pro rata reduction in his Monthly Interest Distribution
than would have occurred absent such redemptions. Funds which are available for
future distributions, payments of expenses and redemptions are in accounts
which are non-interest bearing to Unit holders and are available for use by
United States Trust Company of New York, pursuant to normal banking procedures.
The Trustee is entitled to the benefit of any reasonable cash balances in the
Income and Principal Accounts. Because of the varying interest payment dates of
the Bonds comprising a Trust Portfolio, accrued interest at any point in time
will be greater than the amount of interest actually received by a Trust and
distributed to Unit holders. This excess accrued but undistributed interest
amount will be added to the value of the units on any purchase made after the
Date of Deposit. If a Unit holder sells all or a portion of his Units a portion
of his sale proceeds will be allocable to his proportionate share of the
accrued interest. Similarly, if a Unit holder redeems all or a portion of his
Units, the Redemption Price per Unit which he is entitled to receive from the
Trustee will also include his accrued interest on the Bonds. (See "Rights of
Unit Holders--Redemption of Units--Computation of Redemption Price per Unit.")
The Trustee is also entitled to withdraw from the Interest Account, and to the
extent funds are not sufficient therein, from the Principal Account, on one or
more Record Dates as may be appropriate, amounts sufficient to recoup advances
which it has made in anticipation of the receipt by the Trust of interest in
respect of Bonds which subsequently fail to pay interest when due.
As of the first day of each month the Trustee will deduct from the Interest
Account of a Trust and, to the extent funds are not sufficient therein, from
the Principal Account of such Trust, amounts necessary to pay the expenses of
such Trust. (See "Tax Exempt Securities Trust--Expenses and Charges.") The
Trustee also may withdraw from said accounts such amounts, if any, as it deems
necessary to establish a reserve for any governmental charges payable out of a
Trust. Amounts so withdrawn shall not be considered a part of the Trust's
assets until such time as the Trustee shall return all or any part of such
amounts to the appropriate account. In addition, the Trustee may withdraw from
the Interest Account and the Principal Account such amounts as may be necessary
to cover redemption of Units by the Trustee. (See "Rights of Unit Holders--
Redemption of Units.")
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The Trustee has agreed to advance to a Trust the amount of accrued interest
due on the Bonds of such Trust from their respective issue dates or previous
interest payment dates through the Date of Deposit. This accrued interest
amount will be paid to the Sponsors as the holders of record of all Units on
the first settlement date for the Units. Consequently, when the Sponsors sell
Units of a Trust, the amount of accrued interest to be added to the Public
Offering Price of the Units purchased by an investor will include only accrued
interest from the day after the Date of Deposit, to, but not including, the
date of settlement of the investor's purchase (normally five business days
after purchase), less any distributions from the Interest Account. The Trustee
will recover its advancements to a Trust (without interest or other cost to
such Trust) from interest received on the Bonds deposited in such Trust.
REPORTS AND RECORDS
The Trustee shall furnish Unit holders in connection with each distribution a
statement of the amount of interest, if any, and the amount of other receipts,
if any, which are being distributed, expressed in each case as a dollar amount
per Unit. In the event that the issuer of any of the Bonds fails to make
payment when due of any interest or principal and such failure results in a
change in the amount which would otherwise be distributed as a monthly
distribution, the Trustee will, with the first such distribution following such
failure, set forth in an accompanying statement, the issuer and the Bond, the
amount of the reduction in the distribution per Unit resulting from such
failure, the percentage of the aggregate principal amount of Bonds which such
Bond represents and, to the extent then determined, information regarding any
disposition or legal action with respect to such Bond. Within a reasonable time
after the end of each calendar year, the Trustee will furnish to each person
who at any time during the calendar year was a Unit holder of record, a
statement (1) as to the Interest Account: interest received (including amounts
representing interest received upon any disposition of Bonds), deductions for
payment of applicable taxes and for fees and expenses of a Trust, redemptions
of Units and the balance remaining after such distributions and deductions,
expressed both as a total dollar amount and as a dollar amount representing the
pro rata share of each Unit outstanding on the last business day of such
calendar year; (2) as to the Principal Account: the dates of disposition of any
Bonds and the net proceeds received therefrom (excluding any portion
representing interest), deductions for payments of applicable taxes and for
fees and expenses of a Trust, redemptions of Units, and the balance remaining
after such distributions and deductions, expressed both as a total dollar
amount and as a dollar amount representing the pro rata share of each Unit
outstanding on the last business day of such calendar year; (3) a list of the
Bonds held and the number of Units outstanding on the last business day of such
calendar year; (4) the Redemption Price per Unit based upon the last
computation thereof made during such calendar year; and (5) amounts actually
distributed during such calendar year from the Interest Account and from the
Principal Account, separately stated, expressed both as total dollar amounts
and as dollar amounts representing the pro rata share of each Unit outstanding.
The accounts of a Trust shall be audited not less frequently than annually by
independent auditors designated by the Sponsors, and the report of such
auditors shall be furnished by the Trustee to Unit holders upon request.
The Trustee shall keep available for inspection by Unit holders at all
reasonable times during usual business hours, books of record and account of
its transactions as Trustee including records of the names and addresses of
Unit holders, certificates issued or held, a current list of Bonds in the
Portfolio of a Trust and a copy of the Trust Agreement.
REDEMPTION OF UNITS
Units may be tendered to the Trustee for redemption at its unit investment
trust office at 770 Broadway, New York, New York 10003, upon payment of any
relevant tax. At the present time there are no specific taxes related to the
redemption of the Units. No redemption fee will be charged by the Sponsors or
the Trustee. Units redeemed by the Trustee will be cancelled.
Certificates for Units to be redeemed must be properly endorsed or
accompanied by a written instrument of transfer. Unit holders must sign exactly
as their name appears on the face of the certificate with the signature
guaranteed by an officer of a national bank or trust company or by a member of
either the New York, Midwest or Pacific Stock Exchange. In certain instances
the Trustee may require additional documents such as, but not limited to, trust
instruments, certificates of death, appointments as executor or administrator
or certificates of corporate authority.
Within seven calendar days following such tender, the Unit holder will be
entitled to receive in cash an amount for each Unit tendered equal to the
Redemption Price per Unit computed as of the Evaluation Time set forth in the
"Summary of Essential Information" in Part A on the date of tender. (See
"Redemption of Units--Computation of Redemption Price per Unit.") The "date of
tender" is deemed to be the date on which Units are received by the Trustee,
except as regards Units received after the close of trading on the New York
Stock Exchange, the date of tender is the next day on which such Exchange is
open for trading, and such Units will be deemed to have been tendered to the
Trustee on such day for redemption at the Redemption Price computed on that
day. For information relating to the purchase by the Sponsors of Units tendered
to the Trustee for redemption at prices in excess of the Redemption Price, see
"Redemption of Units--Purchase by the Sponsors of Units Tendered for
Redemption."
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Accrued interest paid on redemption shall be withdrawn from the Interest
Account, or, if the balance therein is insufficient, from the Principal
Account. All other amounts paid on redemption shall be withdrawn from the
Principal Account. The Trustee is empowered to sell Bonds in order to make
funds available for redemption. Such sales, if required, could result in a sale
of Bonds by the Trustee at a loss. To the extent Bonds are sold, the size and
diversity of a Trust will be reduced.
The Trustee reserves the right to suspend the right of redemption and to
postpone the date of payment of the Redemption Price per Unit for any period
during which the New York Stock Exchange is closed, other than weekend and
holiday closings, or trading on that Exchange is restricted or during which (as
determined by the Securities and Exchange Commission) an emergency exists as a
result of which disposal or evaluation of the underlying Bonds is not
reasonably practicable, or for such other periods as the Securities and
Exchange Commission has by order permitted.
COMPUTATION OF REDEMPTION PRICE PER UNIT--The Redemption Price per Unit of a
Trust is determined by the Trustee on the basis of the bid prices of the Bonds
in such Trust as of the Evaluation Time on the date any such determination is
made. The Redemption Price per Unit of a Trust is each Unit's pro rata share,
determined by the Trustee, of: (1) the aggregate value of the Bonds in such
Trust on the bid side of the market (determined by the Evaluator as set forth
below), (2) cash on hand in such Trust (other than funds covering contracts to
purchase Bonds), and accrued and unpaid interest on the Bonds as of the date of
computation, less (a) amounts representing taxes or governmental charges
payable out of such Trust, (b) the accrued expenses of such Trust, and (c) cash
held for distribution to Unit holders of such Trust of record as of a date
prior to the evaluation. The Evaluator may determine the value of the Bonds in
the Trust (1) on the basis of current bid prices for the Bonds, (2) if bid
prices are not available for any Bonds, on the basis of current bid prices for
comparable securities, (3) by appraisal, or (4) by any combination of the
above.
The difference between the bid and offering prices of the Bonds may be
expected to average approximately 1 1/2% of principal amount. In the case of
actively traded securities, the difference may be as little as 1/2 of 1%, and
in the case of inactively traded securities such difference usually will not
exceed 3%. The price at which Units may be redeemed could be less than the
price paid by the Unit holder. On the Date of Deposit for each Trust the
aggregate current offering price of such Bonds per Unit exceeded the bid price
of such Bonds per Unit by the amounts set forth under Part A, "Summary of
Essential Information."
PURCHASE BY THE SPONSORS OF UNITS TENDERED FOR REDEMPTION--The Trust
Agreement requires that the Trustee notify the Sponsors of any tender of Units
for redemption. So long as the Sponsors are maintaining a bid in the secondary
market, the Sponsors, prior to the close of business on the second succeeding
business day, will purchase any Units tendered to the Trustee for redemption at
the price so bid by making payment therefor to the Unit holder in an amount not
less than the Redemption Price not later than the day on which the Units would
otherwise have been redeemed by the Trustee. (See "Public Offering--Market for
Units.")
The offering price of any Units resold by the Sponsors will be the Public
Offering Price determined in the manner provided in this Prospectus. (See
"Public Offering--Offering Price.") Any profit resulting from the resale of
such Units will belong to the Sponsors which likewise will bear any loss
resulting from a lower offering or redemption price subsequent to their
acquisition of such Units. (See "Public Offering--Sponsors' and Underwriters'
Profits.")
SPONSORS
Smith Barney Shearson Inc., 1345 Avenue of the Americas, New York, New York
10105 ("Smith Barney"), was incorporated in Delaware in 1960 and traces its
history through predecessor partnerships to 1873. Smith Barney, an investment
banking and securities broker-dealer firm, is a member of the New York Stock
Exchange, Inc. and other major securities and commodities exchanges, the
National Association of Securities Dealers, Inc. and the Securities Industry
Association. Smith Barney is an indirect wholly-owned subsidiary of The
Travelers Inc.
Kidder, Peabody & Co. Incorporated, 60 Broad Street, New York, New York 10004
("Kidder, Peabody"), was incorporated in Delaware in 1956 and traces its
history through predecessor partnerships to 1865. Kidder, Peabody, an
investment banking and securities broker-dealer firm, is a member of the New
York Stock Exchange, Inc. and other major securities and option exchanges, the
National Association of Securities Dealers, Inc. and the Securities Industry
Association.
Smith Barney sponsors seven open-end investment companies, Smith Barney
Equity Funds, Inc., Smith Barney Funds, Inc., Smith Barney Variable Account
Funds, Smith Barney Tax Free Money Fund, Inc., Smith Barney Money Funds, Inc.,
Smith Barney Muni Bond Funds and Smith Barney World Funds, Inc. and three
closed-end investment companies: Smith Barney Intermediate Municipal Fund,
Inc., The Inefficient-Market Fund, Inc. and Smith Barney Municipal Fund, Inc.
Smith Barney also sponsors all Series of Corporate Securities Trust, Government
Securities Trust and Harris, Upham Tax-Exempt Fund and acts as co-sponsor of
certain trusts of The Equity Income Fund, Concept Series. Kidder, Peabody
sponsors Target Corporate High Yield Series Unit Trust and a family of open-end
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investment companies, presently including: Kidder, Peabody Government Money
Fund, Inc., Kidder, Peabody Premium Account Fund, Kidder, Peabody Tax Exempt
Money Fund, Inc., Kidder, Peabody Cash Reserve Fund, Inc., Kidder, Peabody
Equity Income Fund, Inc., Kidder, Peabody Government Income Fund, Inc., Kidder,
Peabody California Tax Exempt Money Fund, Liquid Institutional Reserves
(Government Securities Income Fund, Money Market Fund and Treasury Securities
Fund), Kidder, Peabody Global Equity Fund, Kidder, Peabody Intermediate Fixed
Income Fund, Kidder, Peabody Adjustable Rate Government Fund, Kidder, Peabody
Global Fixed Income Fund, Kidder, Peabody Municipal Money Market Series
(Connecticut, New Jersey and New York), Kidder, Peabody Municipal Bond Fund,
Kidder, Peabody Emerging Markets Equity Fund, Kidder, Peabody Small Cap Equity
Fund, Institutional Adjustable Rate Government Portfolio and Kidder, Peabody
Asset Allocation Fund. Kidder Peabody Asset Management, Inc., a subsidiary of
Kidder, Peabody, is the investment adviser and/or manager of each of these
open-end investment companies. The Sponsors have acted previously as managing
underwriters of other investment companies. In addition to participating as a
member of various underwriting and selling groups or as agent of other
investment companies, the Sponsors also execute orders for the purchase and
sale of securities of investment companies and sell securities to such
companies in their capacities as brokers or dealers in securities.
LIMITATIONS ON LIABILITY
The Sponsors are jointly and severally liable for the performance of their
obligations arising from their responsibilities under the Trust Agreement, but
will be under no liability to Unit holders for taking any action or refraining
from any action in good faith or for errors in judgment or responsible in any
way for depreciation or loss incurred by reason of the sale of any Bonds,
except in cases of willful misfeasance, bad faith, gross negligence or reckless
disregard of their obligations and duties. (See "Tax Exempt Securities Trust--
Portfolio" and "Sponsors--Responsibility.")
RESPONSIBILITY
The Sponsors are empowered to direct the Trustee to dispose of Bonds when
certain events occur that adversely affect the value of the Bonds, including
default in payment of interest or principal, default in payment of interest or
principal on other obligations of the same issuer, institution of legal
proceedings, default under other documents adversely affecting debt service,
decline in price or the occurrence of other market or credit factors, or
decline in projected income pledged for debt service on revenue Bonds and
advanced refunding that, in the opinion of the Sponsors, may be detrimental to
the interests of the Unit holders.
The Sponsors intend to provide portfolio services for each Trust in order to
determine whether the Trustee should be directed to dispose of any such Bonds.
It is the responsibility of the Sponsors to instruct the Trustee to reject
any offer made by an issuer of any of the Bonds to issue new obligations in
exchange and substitution for any Bonds pursuant to a refunding or refinancing
plan, except that the Sponsors may instruct the Trustee to accept such an offer
or to take any other action with respect thereto as the Sponsors may deem
proper if the issuer is in default with respect to such Bonds or in the
judgment of the Sponsors the issuer will probably default in respect to such
Bonds in the foreseeable future.
Any obligations so received in exchange or substitution will be held by the
Trustee subject to the terms and conditions of the Trust Agreement to the same
extent as Bonds originally deposited thereunder. Within five days after the
deposit of obligations in exchange or substitution for underlying Bonds, the
Trustee is required to give notice thereof to each Unit holder, identifying the
Bonds eliminated and the Bonds substituted therefor. Except as stated in this
and the preceding paragraph, the acquisition by a Trust of any securities other
than the Bonds initially deposited in the Trust is prohibited.
Smith Barney Shearson Inc. has been appointed by Kidder, Peabody & Co.
Incorporated as agent for purposes of taking any action required or permitted
to be taken by the Sponsors under the Trust Agreement. If the Sponsors are
unable to agree with respect to action to be taken jointly by them under the
Trust Agreement and they cannot agree as to which Sponsor shall act as sole
Sponsor, then Smith Barney Shearson Inc. shall act as sole Sponsor. If one of
the Sponsors fails to perform its duties under the Trust Agreement or becomes
incapable of acting or becomes bankrupt or its affairs are taken over by public
authorities, that Sponsor is automatically discharged under the Trust Agreement
and the remaining Sponsor acts as Sponsor.
RESIGNATION
Any Sponsor may resign provided that at the time of such resignation each
remaining Sponsor maintains a net worth of $1,000,000 and is agreeable to such
resignation. Concurrently with or subsequent to such resignation a new Sponsor
may be appointed by the remaining Sponsors and the Trustee to assume the duties
of the resigning Sponsor. If all Sponsors resign or otherwise fail or become
unable to perform their duties under the Trust Agreement, and no express
provision is made for action by the Trustee in such event, the Trustee may
appoint a successor sponsor or terminate the Trust Agreement and liquidate the
Trusts.
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TRUSTEE
The Trustee is United States Trust Company of New York, with its principal
place of business at 114 West 47th Street, New York, New York 10036. United
States Trust Company of New York has, since its establishment in 1853, engaged
primarily in the management of trust and agency accounts for individuals and
corporations. The Trustee is a member of the New York Clearing House
Association and is subject to supervision and examination by the Superintendent
of Banks of the State of New York, the Federal Deposit Insurance Corporation
and the Board of Governors of the Federal Reserve System. In connection with
the storage and handling of certain Bonds deposited in the Trust, the Trustee
may use the services of The Depository Trust Company. These services may
include safekeeping of the Bonds and coupon-clipping, computer book-entry
transfer and institutional delivery services. The Depository Trust Company is a
limited purpose trust company organized under the Banking Law of the State of
New York, a member of the Federal Reserve System and a clearing agency
registered under the Securities Exchange Act of 1934.
LIMITATIONS ON LIABILITY
The Trustee shall not be liable or responsible in any way for depreciation or
loss incurred by reason of the disposition of any moneys, securities or
certificates or in respect of any evaluation or for any action taken in good
faith reliance on prima facie properly executed documents except in cases of
willful misfeasance, bad faith, gross negligence or reckless disregard for its
obligations and duties. In addition, the Trustee shall not be personally liable
for any taxes or other governmental charges imposed upon or in respect of a
Trust which the Trustee may be required to pay under current or future law of
the United States or any other taxing authority having jurisdiction. (See "Tax
Exempt Securities Trust-- Portfolio.") For information relating to the
responsibilities and indemnification of the Trustee under the Trust Agreement,
reference is made to the material set forth under "Rights of Unit Holders",
"Sponsors--Resignation" and "Other Charges."
RESIGNATION
By executing an instrument in writing and filing the same with the Sponsors,
the Trustee and any successor may resign. In such an event the Sponsors are
obligated to appoint a successor trustee as soon as possible. If the Trustee
becomes incapable of acting or becomes bankrupt or its affairs are taken over
by public authorities, the Sponsors may remove the Trustee and appoint a
successor as provided in the Trust Agreement. Such resignation or removal shall
become effective upon the acceptance of appointment by the successor trustee.
If no successor has accepted the appointment within thirty days after notice of
resignation, the retiring trustee may apply to a court of competent
jurisdiction for the appointment of a successor. The resignation or removal of
a trustee becomes effective only when the successor trustee accepts its
appointment as such or when a court of competent jurisdiction appoints a
successor trustee.
EVALUATOR
The Evaluator is Kenny S&P Evaluation Services, a division of Kenny
Information Systems, Inc., with main offices located at 65 Broadway, New York,
New York 10006.
LIMITATIONS ON LIABILITY
The Trustee, Sponsors and Unit holders may rely on any evaluation furnished
by the Evaluator and shall have no responsibility for the accuracy thereof.
Determination by the Evaluator under the Trust Agreement shall be made in good
faith upon the basis of the best information available to it; provided,
however, that the Evaluator shall be under no liability to the Trustee, the
Sponsors, or Unit holders for errors in judgment. But this provision shall not
protect the Evaluator in cases of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties.
RESPONSIBILITY
The Trust Agreement requires the Evaluator to evaluate the Bonds of a Trust
on the basis of their bid prices on the last business day of June and December
in each year, on the day on which any Unit of such Trust is tendered for
redemption and on any other day such evaluation is desired by the Trustee or is
requested by the Sponsors. For information relating to the responsibility of
the Evaluator to evaluate the Bonds on the basis of their offering prices, see
"Public Offering--Offering Price."
RESIGNATION
The Evaluator may resign or may be removed by the joint action of the
Sponsors and the Trustee, and in such event, the Sponsors and the Trustee are
to use their best efforts to appoint a satisfactory successor. Such resignation
or removal shall become effective
B-20
<PAGE>
upon the acceptance of appointment by a successor evaluator. If upon
resignation of the Evaluator no successor has accepted appointment within
thirty days after notice of resignation, the Evaluator may apply to a court of
competent jurisdiction for the appointment of a successor.
AMENDMENT AND TERMINATION OF THE TRUST AGREEMENT
AMENDMENT
The Sponsors and the Trustee have the power to amend the Trust Agreement
without the consent of any of the Unit holders when such an amendment is (1)
to cure any ambiguity or to correct or supplement any provision of the Trust
Agreement which may be defective or inconsistent with any other provision
contained therein, or (2) to make such other provisions as shall not adversely
affect the interests of the Unit holders; provided, that the Trust Agreement
is not amended to increase the number of Units issuable thereunder or to
permit the deposit or acquisition of securities either in addition to or in
substitution for any of the Bonds initially deposited in a Trust, except for
the substitution of certain refunding securities for such Bonds or to permit
the Trustee to engage in business or investment activities not specifically
authorized in the Trust Agreement as originally adopted. In the event of any
amendment, the Trustee is obligated to notify promptly all Unit holders of the
substance of such amendment.
TERMINATION
The Trust Agreement provides that if the principal amount of Bonds held in
Trust is less than 50% of the principal amount of the Bonds originally
deposited in such Trust, the Trustee may in its discretion and will, when
directed by the Sponsors, terminate such Trust. A Trust may be terminated at
any time by 100% of the Unit holders. However, in no event may a Trust
continue beyond the Mandatory Termination Date set forth under Part A,
"Summary of Essential Information." In the event of termination, written
notice thereof will be sent by the Trustee to all Unit holders. Within a
reasonable period after termination, the Trustee will sell any Bonds remaining
in the affected Trust, and, after paying all expenses and charges incurred by
such Trust, will distribute to each Unit holder, upon surrender for
cancellation of his certificate for Units, his pro rata share of the balances
remaining in the Interest and Principal Account of such Trust.
LEGAL OPINION
The legality of the Units has been passed upon by Davis Polk & Wardwell, 450
Lexington Avenue, New York, New York 10017, as special counsel for the
sponsors.
AUDITORS
The Statements of Financial Condition and the Portfolios of Securities
included in this Prospectus have been audited by KPMG Peat Marwick,
independent auditors, as indicated in their report with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
BOND RATINGS+
ALL RATINGS SHOWN UNDER PART A, "PORTFOLIO OF SECURITIES", EXCEPT THOSE
IDENTIFIED OTHERWISE, ARE BY STANDARD & POOR'S RATINGS GROUP, A DIVISION OF
MCGRAW-HILL, INC. ("STANDARD & POOR'S").
STANDARD & POOR'S
A Standard & Poor's corporate or municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
debt obligation. This assessment of creditworthiness may take into
consideration obligors such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase or sell a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished to Standard & Poor's
by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information.
- -------
+As described by the rating agencies.
B-21
<PAGE>
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal, and in the majority of instances they differ from AAA issues only in
small degrees.
A--Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse affects of changes
in circumstances and economic conditions than bonds in higher-rated categories.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in the higher-rated categories.
Plus (+) or Minus (-): To provide more detailed indications of credit
quality, the ratings from "AA" to "BB" may be modified by the addition of a
plus or minus sign to show relative standing within the major rating
categories.
Provisional Ratings: The letter "p" following a rating indicates the rating
is provisional. A provisional rating assumes the successful completion of the
project being financed by the issuance of the bonds being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon
the successful and timely completion of the project. This rating, however,
while addressing credit quality subsequent to completion, makes no comment on
the likelihood of, or the risk of default upon failure of, such completion.
Accordingly, the investor should exercise his own judgment with respect to such
likelihood and risk.
Conditional rating(s), indicated by "Con" are given to bonds for which the
continuance of the security rating is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation confirming
investments and cash flows and/or the security rating is conditional upon the
issuance of insurance by the respective insurance company.
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
A brief description of the applicable Moody's rating symbols and their
meanings is as follows:
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. Aa bonds are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations:
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Rating symbols may include numerical modifiers "1," "2," or "3." The
numerical modifier "1" indicates that the security ranks at the high end, "2"
in the mid-range, and "3" nearer the low end of the generic category. These
modifiers of rating symbols "Aa," "A" and "Baa" are to give investors a more
precise indication of relative debt quality in each of the historically defined
categories.
B-22
<PAGE>
FITCH INVESTORS SERVICE, INC. ("FITCH")
AAA--These bonds are considered to be investment grade and of the highest
quality. The obligor has an extraordinary ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--These bonds are considered to be investment grade and of high quality.
The obligor's ability to pay interest and repay principal, while very strong,
is somewhat less than for AAA rated securities or more subject to possible
change over the term of the issue.
A--These bonds are considered to be investment grade and of good quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB--These bonds are considered to be investment grade and of satisfactory
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however are more likely to weaken this ability than bonds with
higher ratings.
A "+" or a "-" sign after a rating symbol indicates relative standing in its
rating.
FEDERAL TAX FREE VS. TAXABLE INCOME
This table shows the approximate yields which taxable securities must earn in
various income brackets to produce, after Federal income tax, returns
equivalent to specified tax-exempt bond yields. The table is computed on the
theory that the taxpayer's highest bracket tax rate is applicable to the entire
amount of any increase or decrease in his or her taxable income resulting from
a switch from taxable to tax-exempt securities or vice versa. The table
reflects the Federal income tax rates and the tax brackets for the 1993 taxable
year under the Code as in effect on the date of this Prospectus. Because the
Federal rate brackets are subject to adjustment based on changes in the
Consumer Price Index, the taxable equivalent yields for subsequent years may
vary somewhat from those indicated in the table. Use this table to find your
tax bracket. Read across to determine the approximate taxable yield you would
need to equal a return free of Federal income tax.
1994 TAX YEAR
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAXABLE INCOME BRACKET* TAX EXEMPT YIELD
JOINT RETURN SINGLE RETURN % TAX RATE 3.5% 4% 4.5% 5.00% 5.50% 6.00% 6.50% 7.00%
TAXABLE EQUIVALENT YIELD
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UP TO $36,900 UP TO $22,100 15.0% 4.117 4.705 5.294 5.882 6.470 7.059 7.647 8.235
$ 36,900- 89,150 $ 22,100- 53,500 28.0% 4.861 5.555 6.250 6.944 7.638 8.333 9.028 9.722
$ 89,150-140,000 $ 53,500-115,000 31.0% 5.072 5.797 6.521 7.246 7.971 8.696 9.420 10.145
$140,000-250,000 $115,000-250,000 36.0% 5.468 6.250 7.031 7.812 8.593 9.375 10.156 10.937
OVER $250,000 OVER $250,000 39.6% 5.794 6.622 7.450 8.278 9.105 9.933 10.761 11.589
- --------------------------------------------------------------------------------------------------
</TABLE>
* The income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions or the standard
deduction. It is assumed that the investor is not subject to the alternative
minimum tax. Where applicable, investors should take into account the
provisions of the Code under which the benefit of certain itemized deductions
and the benefit of personal exemptions are limited in the case of higher
income individuals. Under the Code, individual taxpayers with adjusted gross
income in excess of a $111,800 threshold amount are subject to an overall
limitation on certain itemized deductions, requiring a reduction equal to the
lesser of (i) 3% of adjusted gross income in excess of the $111,800 threshold
amount or (ii) 80% of the amount of such itemized deductions otherwise
allowable. The benefit of each personal exemption is phased-out for married
taxpayers filing a joint return with adjusted gross income in excess of
$167,700 and for single taxpayers with adjusted gross income in excess of
$111,800. Personal exemptions are phased out at the rate of two percentage
points for each $2,500 (or fraction thereof) of adjusted gross income in
excess of the applicable threshold amount. The first three Federal tax
brackets, the threshold amounts at which itemized deductions are subject to
reduction, and the range over which personal exemptions are phased out will
be adjusted for inflation for each year. The 36.0% and 39.6% Federal tax
brackets will be adjusted for inflation for each year after 1994.
B-23
<PAGE>
PROSPECTUS--PART C:
- --------------------------------------------------------------------------------
NOTE: PART C OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED UNLESS ACCOMPANIED BY
PARTS A AND B.
- --------------------------------------------------------------------------------
TAX EXEMPT SECURITIES TRUST--THE STATE TRUSTS
Potential purchasers of the Units of a State Trust should consider the fact
that the Trust's Portfolio consists primarily of Bonds issued by the state for
which such State Trust is named or its municipalities or authorities and
realize the substantial risks associated with an investment in such Bonds. Each
State Trust is subject to certain additional risk factors. The Sponsors believe
the discussions of risk factors summarized below describe some of the more
significant aspects of the State Trusts. The sources of such information are
the official statements of issuers as well as other publicly available
documents. While the Sponsors have not independently verified this information,
they have no reason to believe that such information is not correct in all
material respects. Investment in a State Trust should be made with an
understanding that the value of the underlying Portfolio may decline with
increases in interest rates.
CALIFORNIA TRUST
RISK FACTORS--The economy of California (the "State") is the largest among
the 50 states and one of the largest in the world. The State's July 1, 1992
population of 31 million represented over 12.0% of the total United States
population. Total employment is about 14 million, the majority of which was in
the service, trade and manufacturing sectors.
Since the start of the 1990-91 fiscal year, the State has faced the worst
economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), exports and financial services, among
others, have all been severely affected. Job losses have been the worst of any
post-war recession. Employment levels are expected to stabilize by late 1993.
However, pre-recession job levels are not expected to be reached for several
more years. Unemployment reached 10% in November 1992 and is expected to remain
above 9% through 1993 and 1994. According to the Department of Finance,
recovery from the recession in California is not expected in meaningful terms
until late 1993 or 1994, notwithstanding signs of recovery elsewhere in the
nation.
After three years of recession, California's economy seems to be stabilizing,
however, economic signals remain mixed. On the plus side, nonfarm employment in
April was essentially unchanged from the December level. The unemployment rate
seems to be moving down, although the large April drop, from 9.4% to 8.6%,
probably exaggerates the improvement. Personal income growth is improving
gradually, from gains of 2% or less in 1991 to slightly over 3% at the
beginning of 1993, and taxable sales are stabilizing after a lengthy decline.
There are still ample signs of weakness. Manufacturing employment continues
to decline, with deep losses in aerospace, reflecting defense cuts and weak
commercial markets. Despite strong output and sales gains, electronics firms
continue to cut payrolls. All manufacturing industries, with the exception of
apparel and textiles, are posting employment losses. Housing, usually an engine
of recovery, remains in a slump. Permit volume has averaged a 95,000 unit
annual rate in recent months, actually somewhat below 1992's 98,000 total.
Nonresidential construction continues to hit new recession lows, reflecting
oversupplied commercial office, retail and hotel markets. Employment continues
to decline in normally stable industries such as banking, the utilities and
most segments of wholesale and retail trade. Food, department and apparel
stores are shedding jobs, and government employment is down 30,000 jobs over
the past year.
The Department of Finance, in its May 1993 Revision of the Governor's 1993-94
Budget, states that it expects this essentially flat pattern of economic
activity to persist throughout 1993, with employment by year end only
marginally higher than in April. Gains in service industries, mainly health
care, temporary agencies (in business services), motion picture production and
amusements are expected to continue. There should be modest increases in
wholesale and retail trade. The finance and transportation and utilities groups
will be stable to down slightly. Assuming a modest pickup in homebuilding,
construction employment will also be flat this year. Against these,
manufacturing and government will continue to lose jobs. The largest losses in
percentage terms will be in aerospace manufacturing and the Federal Department
of Defense, reflecting cuts in the military budget. Budget constraints will
also affect State and local government.
The recession has seriously affected State tax revenues, which basically
mirror economic conditions. It has also caused increased expenditures for
health and welfare programs. The State has also been facing a structural
imbalance in its budget with the largest programs supported by the General
Fund--K-14 education (kindergarten through community college), health, welfare
and corrections--growing at rates significantly higher than the growth rates
for the principal revenue sources of the General Fund. As a result, the State
has experienced recurring budget deficits; the State Controller reports that
expenditures exceeded revenues for four of the last five completed fiscal
years. Revenues declined in 1990-91 over 1989-90, the first time since the
1930s. By June 30, 1993, according to the
C-1
<PAGE>
Department of Finance, the State's Reserve for Economic Uncertainties had a
deficit, on a budget basis, of approximately $2.75 billion. A further
consequence of the large budget imbalances over the last three fiscal years has
been that the State depleted its available cash resources and has had to use a
series of external borrowings to meet its cash needs.
1992-93 BUDGET. By the time the 1992-93 Governor's Budget was presented in
January 1992, it was evident the recession was much deeper than earlier
anticipated. To balance the proposed budget, program reductions totalling
$4.365 billion and revenue and transfer increases of $872 million were proposed
for the 1991-92 and 1992-93 fiscal years. By the time of the Governor's May
Revision, issued on May 20, 1992, the Administration estimated that the 1992-93
Budget needed to address a gap of about $7.9 billion, much of which was needed
to repay the accumulated budget deficits of the previous two years.
The severity of the budget actions needed led to a long delay in adopting the
budget. With the failure to adopt a budget by July 1, 1992, which would have
allowed the State to carry out its normal annual cash flow borrowing, the
Controller was forced to issue registered warrants to pay a variety of
obligations representing prior years' or continuing appropriations, and
mandates from court orders. Available funds were used to make constitutionally-
mandated payments, such as debt service on bonds and revenue anticipations
warrants. Between July 1 and September 4, 1992, the Controller issued a total
of approximately $3.8 billion of registered warrants. After that date, all
remaining outstanding registered warrants (about $2.9 billion) were called for
redemption from proceeds of the issuance of 1992 Interim Notes after the budget
was adopted.
The 1992-93 Budget Act, signed by the Governor on September 2, 1992, provided
for expenditures of $57.4 billion and consisted of General Fund expenditures of
$40.8 billion and Special Fund and Bond Fund expenditures of $16.6 billion. The
Department of Finance estimated in September 1992 that there would be a balance
in the Special Fund for Economic Uncertainties of $28 million on June 30, 1993.
The $7.9 billion budget gap was closed through a combination of increased
revenues and transfers and expenditure cuts such as:
1. General Fund savings in health and welfare programs totalling $1.6
billion.
2. General Fund reductions of $1.9 billion for K-12 schools and community
colleges.
3. General Fund savings of $1.3 billion by revising the State aid program
to local governments originally enacted after Proposition 13.
4. Program cuts for higher education totaling $415 million.
5. A total of $1.6 billion of transfers and accelerated collections of
State revenues.
6. Approximately $1.0 billion from various additional program reductions.
Shortly after the 1992-93 Budget Act was enacted, it became evident the
economic conditions in the State were not beginning to improve in the second
half of 1992, as assumed by the Department of Finance's May 1992 economic
estimates. This was exacerbated by enactment of an initiative measure in
November 1992 repealing a sales tax for certain candy, snack foods and bottled
water, reducing revenues by about $300 million for a full fiscal year ($200
million in 1992-93). The Governor's Budget proposal for 1993-94, released on
January 8, 1993 (the "January Governor's Budget"), confirmed the earlier
forecasts about the State's economy and the 1992-93 Budget Act. The January
Governor's Budget projected that the economy would not start meaningful
recovery from the recession until late 1993 or 1994. With the economy
continuing in recession throughout the 1992-93 fiscal year, revenues were
projected about $2.5 billion lower than anticipated when the 1992-93 Budget Act
was signed, leading to a projected $2.1 billion budget deficit at June 30, 1993
(compared to the Budget Act projection of a $28 million balance). That deficit
amount was projected if, by March 1993, the Legislature adopted several actions
proposed by the Governor to save about $475 million in the 1992-93 fiscal year.
The Legislature did not adopt any of the Governor's proposals.
On May 20, 1993, the Department of Finance released its May Revision to the
January Governor's Budget (the "May Revision"), updating revenue and
expenditure projections and proposals for the 1992-93 and 1993-94 fiscal years.
The May Revision projected that the General Fund will end the fiscal year on
June 30, 1993 with an accumulated budget deficit of about $2.8 billion, and a
negative fund balance of about $2.2 billion (the difference being certain
reserves for encumbrances and school funding costs). The Governor projected
revenues for 1992-93 of $41.0 billion, $1.0 billion less than in the 1991-92
fiscal year. On the expenditure side, the continued recession increased health
and welfare costs above the original Budget Act projections. Also, property tax
receipts at the local level were less than projected, so that the State will
not get the full $1.3 billion benefit from the property tax shift enacted in
the 1992-93 Budget Act. Overall, the May Revision projected total General Fund
expenditures of $41.1 billion for the 1992-93 fiscal year, about $300 million
higher than the Budget Act and $2.2 billion less than fiscal year 1991-92.
The January Governor's Budget had projected that, because of severely reduced
revenues, the State would face a cash flow shortfall in May 1993, necessitating
additional external borrowing. The State met this cash flow need by issuing
$3.0 billion of revenue anticipation notes on April 26, 1993, which matured on
June 24, 1993. The State also issued the 1993 Revenue Participation Warrants in
the principal amount of $2.0 billion to meet cash flow requirements for the end
of the 1992-93 fiscal year and the start of the 1993-94 fiscal year.
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<PAGE>
1993-94 BUDGET. The 1993-94 fiscal year represents the third consecutive year
the Governor and the Legislature were faced with a very difficult budget
environment, requiring revenue actions and expenditure cuts totalling multiple
billions of dollars to produce a balanced budget.
The Governor's Budget introduced on January 8, 1993 proposed General Fund
expenditures of $37.33 billion, with projected revenues of $39.87 billion. It
also proposed Special Fund expenditures of $12.35 billion and Special Fund
Revenues of $12.10 billion. To balance the budget in the face of declining
revenues, the Governor proposed a series of revenue shifts from local
government, reliance on increased federal aid, and reductions in State
spending.
The May Revision of the Governor's Budget, released on May 20, 1993,
indicated that the revenue projections of the January Budget Proposal were
tracking well, with the full year 1992-93 about $80 million higher than the
January projection. Personal income tax revenue was higher than projected,
sales tax was close to target, and bank and corporation taxes were lagging
behind projections. The May Revision projected the State would have about $2.7
billion accumulated deficit by June 30, 1993. The Governor proposed to repay
this deficit over an 18-month period. He also agreed to retain the 0.5% sales
tax scheduled to expire June 30 for a six-month period, dedicated to local
public safety purposes, with a November election to determine a permanent
extension. Unlike previous years, the Governor's Budget and May Revision did
not calculate a "gap" to be closed, but rather set forth revenue and
expenditure forecasts and proposals designed to produce a balanced budget.
The 1993-94 Budget Act, signed by the Governor on June 30, 1993, is
predicated on revenue and transfer estimates of $40.6 billion, about $700
million higher than the January Governor's Budget, but still about $400 million
below 1992-93 (and the second consecutive year of actual decline). The
principal reasons for this decline are the continued weak economy and the
expiration (or repeal) of three fiscal steps taken in 1991--a half cent
temporary sales tax (which generates about $1.5 billion annually), a deferral
of operating loss carry forwards ($440 million), and repeal by initiative of a
sales tax on candy and snack foods ($300 million). The Governor also proposes a
number of fiscal steps (tax credits and the like) to stimulate job growth,
which could result in short-term revenue costs. The 1993-94 Budget Act assumes
Special Fund revenues of $11.8 billion, an increase of 5.0% over 1992-93.
The 1993-94 Budget Act includes General Fund expenditures of $38.5 billion (a
6.5% reduction from projected 1992-93 expenditures of $41.2 billion), in order
to keep a balanced budget within the available revenues. The Budget also
includes Special Fund expenditures of $12.1 billion, a 4.2% increase. The
Budget Act reflects the following major adjustments:
1. Changes in local government financing to shift about $2.6 billion in
property taxes from cities, counties, special districts and redevelopment
agencies to school and community college districts.
2. The Budget keeps K-12 Proposition 98 funding on a cash basis at the
same per-pupil level as 1992-93 by providing schools a loan payable from
future years' Proposition 98 funds.
3. Receipt in 1993-94 of about $550 million in aid from the federal
government to offset health and welfare costs associated with foreign
immigrants living in the State, which would reduce a like amount of General
Fund expenditures.
4. Reductions of $0.3 billion in health and welfare programs.
5. Reductions of $400 million in support for higher education.
6. A 2 year suspension of the renters' tax credit ($390 million
expenditure reduction in 1993-94).
7. Various miscellaneous cuts (totalling approximately $150 million) in
State government services in many agencies, up to 15%.
8. Miscellaneous one-time items, including deferral of payment to the
Public Employees Retirement Fund and a change in accounting for debt
service from accrual to cash basis, saving $107 million.
A key feature of the 1993-94 Budget Act is a plan to retire the projected
$2.8 billion accumulated deficit over an 18-month period by the use of external
borrowing. The Budget Act estimates that about $1.6 billion of the deficit
elimination loan would be repaid by December 23, 1993 from the proceeds of the
$2.0 billion Revenue Anticipation Warrants issued on June 23, 1993.
The 1993-94 Budget Act continues to predict that population growth in the
1990's will keep upward pressure on major State programs, such as K-14
education, health, welfare and corrections, outstripping projected revenue
growth in an economy only very slowly emerging from a deep recession. The
Governor's health, welfare and local government reductions continue his efforts
to keep expenditures in line with resources in the long term. The Budget Act
also proposes significant restructuring of State government, with elimination
and consolidation of several agencies and numerous smaller boards, and change
to a "performance budgeting" concept which would be more efficient and cost-
effective (with a pilot project to be implemented in 1994-95). The Governor
also proposes initiatives in the field of information technology to increase
governmental productivity.
On June 2, 1993, the Commission on State Finance ("COSF") issued its
Quarterly General Fund Forecast, which assessed the Governor's May Revision.
The COSF report projected stagnant economic conditions through 1994, and agreed
generally with the
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<PAGE>
Governor's economic projections, although the COSF showed slightly lower
growth than the Governor in some California economic factors. The COSF
projects lower revenues and higher expenditures in 1993-94 than the May
Revision, and notes that the May Revision continues the use of off-book loans
to schools and has no built-in protection against downside risk.
The COSF projects about $700 million lower revenues in 1993-94 than the May
Revision, principally because COSF believes most of the increase in personal
income taxes seen late in 1992-93 came from a one-time income shift, rather
than reflecting a permanent base of greater tax revenues. COSF also shows
other major taxes (and local property taxes) a little weaker than the May
Revision, with a resulting increase in expenditures to make up the property
tax shortfall for school financing. Altogether, COSF projects in its "primary
forecast" that the fund balance at June 30, 1994 would be over $800 million
more negative than the May Revision forecast, and the negative difference
would grow to $1.9 billion by June 30, 1995.
The COSF report includes two alternative forecasts based on either continued
recession, or stronger recovery. The pessimistic forecast is $3.8 billion
worse at June 30, 1995 than the Primary Forecast, and the optimistic forecast
is about $3.8 billion better. The COSF also expressed concern that the
proposed $2.6 billion shift of property taxes could materially impact local
governments' fiscal stability.
THE FOREGOING DISCUSSION OF THE 1993-94 FISCAL YEAR BUDGET IS BASED IN LARGE
PART ON STATEMENTS MADE IN A RECENT "PRELIMINARY OFFICIAL STATEMENT"
DISTRIBUTED BY THE STATE OF CALIFORNIA. IN THAT DOCUMENT, THE STATE INDICATED
THAT ITS DISCUSSION OF THE 1993-94 FISCAL YEAR BUDGET IS BASED ON ESTIMATES
AND PROJECTIONS OF REVENUES AND EXPENDITURES FOR THE CURRENT FISCAL YEAR AND
MUST NOT BE CONSTRUED AS STATEMENTS OF FACT. THE STATE NOTED FURTHER THAT THE
ESTIMATES AND PROJECTIONS ARE BASED UPON VARIOUS ASSUMPTIONS WHICH MAY BE
AFFECTED BY NUMEROUS FACTORS, INCLUDING FUTURE ECONOMIC CONDITIONS IN THE
STATE AND THE NATION, AND THAT THERE CAN BE NO ASSURANCE THAT THE ESTIMATES
WILL BE ACHIEVED.
STATE APPROPRIATIONS LIMIT. The State is subject to an annual appropriations
limit imposed by Article XIIIB of the State Constitution (the "Appropriations
Limit"), and is prohibited from spending "appropriations subject to
limitation" in excess of the Appropriations Limit. Article XIIIB, originally
adopted in 1979, was modified substantially by Propositions 98 and 111 in 1988
and 1990, respectively "Appropriations subject to limitation" are
authorizations to spend "proceeds of taxes," which consist of tax revenues and
certain other funds, including proceeds from regulatory licenses, user charges
or other fees to the extent that such proceeds exceed the reasonable cost of
providing the regulation, product or service. The Appropriations Limit is
based on the limit for the prior year, adjusted annually for certain changes,
and is tested over consecutive two-year periods. Any excess of the aggregate
proceeds of taxes received over such two-year period above the combined
Appropriation Limits for those two years is divided equally between transfers
to K-14 districts and refunds to taxpayers.
Exempted from the Appropriations Limit are debt service costs of certain
bonds, court or federally mandated costs, and, pursuant to Proposition 111,
qualified capital outlay projects and appropriations or revenues derived from
any increase in gasoline taxes and motor vehicle weight fees above January 1,
1990 levels. Some recent initiatives were structured to create new tax
revenues dedicated to specific uses and expressly exempted from the Article
XIIIB limits. The Appropriations Limit may also be exceeded in cases of
emergency arising from civil disturbance or natural disaster declared by the
Governor and approved by two-thirds of the Legislature. If not so declared and
approved, the Appropriations Limit for the next three years must be reduced by
the amount of the excess.
Article XIIIB, as amended by Proposition 98 on November 8, 1988, also
establishes a minimum level of state funding for school and community college
districts and requires that excess revenues up to a certain limit be
transferred to schools and community college districts instead of returned to
the taxpayers. Determination of the minimum level of funding is based on
several tests set forth in Proposition 98. During fiscal year 1991-92 revenues
were smaller than expected, thus reducing the payment owed to schools in 1991-
92 under alternate "test" provisions. In response to the changing revenue
situation, and to fully fund the Proposition 98 guarantee in the 1991-92 and
1992-93 fiscal years without exceeding it, the Legislature enacted legislation
to reduce 1991-92 appropriations. The amount budgeted to schools but which
exceeded the reduced appropriation was treated as a non-Proposition 98 short-
term loan in 1991-92. As part of the 1992-93 Budget, $1.1 billion of the
amount budgeted to K-14 schools was designated to "repay" the prior year loan,
thereby reducing cash outlays in 1992-93 by that amount.
Because of the complexities of Article XIIIB, the ambiguities and possible
inconsistencies in its terms, the applicability of its exceptions and
exemptions and the impossibility of predicting future appropriations, the
Sponsors cannot predict the impact of this or related legislation on the Bonds
in the Trust Portfolio. Other Constitutional amendments affecting state and
local taxes and appropriations have been proposed from time to time. If any
such initiatives are adopted, the State could be pressured to provide
additional financial assistance to local governments or appropriate revenues
as mandated by such initiatives. Propositions such as Proposition 98 and
others that may be adopted in the future, may place increasing pressure on the
State's budget over future years, potentially reducing resources available for
other State programs, especially to the extent the Article XIIIB spending
limit would restrain the State's ability to fund such other programs by
raising taxes.
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STATE INDEBTEDNESS. As of June 30, 1993, the State had over $17.64 billion
aggregate amount of its general obligation bonds outstanding. General
obligation bond authorizations in the aggregate amount of approximately $7.24
billion remained unissued as of June 30, 1993. The State also builds and
acquires capital facilities through the use of lease purchase borrowing. As of
June 30, 1992, the State had approximately $2.88 billion of outstanding Lease-
Purchase Debt.
In addition to the general obligation bonds, State agencies and authorities
had approximately $21.87 billion aggregate principal amount of revenue bonds
and notes outstanding as of March 31, 1993. Revenue bonds represent both
obligations payable from State revenue-producing enterprises and projects,
which are not payable from the General Fund, and conduit obligations payable
only from revenues paid by private users of facilities financed by such revenue
bonds. Such enterprises and projects include transportation projects, various
public works and exposition projects, educational facilities (including the
California State University and University of California systems), housing,
health facilities and pollution control facilities.
LITIGATION. The State is a party to numerous legal proceedings, many of which
normally occur in governmental operations. In addition, the State is involved
in certain other legal proceedings that, if decided against the State, might
require the State to make significant future expenditures or impair future
revenue sources. Examples of such cases include challenges to the State's
method of taxation of certain businesses, challenges to certain vehicle license
fees, and challenges to the State's use of Public Employee Retirement System
funds to offset future State and local pension contributions. Other cases which
could significantly impact revenue or expenditures involve reimbursement to
school districts for voluntary school desegregation and state mandated costs,
challenges to Medi-Cal eligibility, recovery for flood damages, and liability
for toxic waste cleanup. Because of the prospective nature of these
proceedings, it is not presently possible to predict the outcome of such
litigation or estimate the potential impact on the ability of the State to pay
debt service on its obligations.
On November 1, 1993 the United States Supreme Court agreed to review the
California court decisions in Barclays Bank International, Ltd. v. Franchise
Tax Board and Colgate-Palmolive Company, Inc. v. Franchise Tax Board which
upheld California's worldwide combined reporting ("WWCR") method of taxing
corporations engaged in a unitary business operation against challenges under
the foreign commerce and due process clauses. In 1983, in Container Corporation
v. Franchise Tax Board, the Supreme Court held that the WWCR method did not
violate the foreign commerce clause in the case of a domestic-based unitary
business group with foreign-domiciled subsidiaries, but specifically left open
the question of whether a different result would obtain for a foreign-based
multinational unitary business. Barclays concerns a foreign-based multinational
and Colgate-Palmolive concerns a domestic-based multinational in light of
federal foreign policy developments since 1983. In a brief filed at the Supreme
Court's request, the Clinton Administration had argued that the Court should
not hear the Barclays case, even though there are "serious questions" about the
California Supreme Court's analysis and holdings, because the recent changes in
the law noted below means the issue in Barclays "lacks substantial recurring
importance." The Clinton Administration had previously decided not to become
involved in the Barclays petition. The United States Government under the Bush
Administration, along with various foreign Governments, had appeared as amicus
on behalf of Barclays before the California Courts. The Clinton Administration
has filed an amicus brief on the merits supporting the California Franchise Tax
Board, arguing that the Court should judge WWCR by looking at federal policies
in effect at the time the taxes were collected and stating that the federal
government had not indicated to the States during the 1970s and 1980s that it
objected to WWCR. The fiscal impact on the State of California has been
reported as follows: the State would have a refund $1.730 billion to taxpayers
($530 million due to Barclays; 41.2 billion due to Colgate), and cancel another
$2.35 billion of pending assessments ($350 million due to Barclays; $1.9
billion due to Colgate), if the Supreme Court ultimately strikes down the WWCR
method and rules its decision has retrospective effect.
RATINGS. As a result of the deterioration in the State's budget and cash
situation in fiscal year 1991-92, and the delay in adopting the 1992-93 budget
which resulted in issuance of registered warrants, rating agencies reduced the
State's credit rating. Between November 1991 and September 30, 1992, the rating
on the State's general obligation bonds was reduced by Standard & Poor's
Corporation from "AAA" to "A+", by Moody's Investors Service from "Aaa" to
"Aa", and by Fitch Investors Service, Inc. from "AAA" to "AA". There can be no
assurance that such ratings will continue for any given period of time or that
they will not in the future be further revised or withdrawn.
The January 1994 Los Angeles earthquake may negatively impact the ability of
certain issuers to make scheduled interest and principal payments, for example,
if the specific project for which bonds were issued is damaged or if revenues
backing certain bonds decline. In addition, the impact on tourism and business
spending resulting from earthquake damage and any delay in its repair could
negatively impact the ability of certain issuers to make timely debt payments.
Further, as with the October 1989 Loma Prieta earthquake that struck San
Francisco, lawsuits may be filed against state agencies. Both Moody's Investors
Service and Standard & Poor's Corporation have said that it is too soon to
offer official assessments of the damage and its effect on bondholders.
However, Moody's has also stated that because the pledge to make debt service
payments for general obligation bonds and essential purpose revenue bonds is
absolute and unconditional, it does not expect any rating adjustment over the
short-term for such bonds. The Sponsors are unable to predict the effects of
this earthquake or any other future natural disaster on the bonds in the
Portfolio of the California Trust.
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CALIFORNIA TAXES
In the opinion of Messrs. Adams, Duque & Hazeltine, Los Angeles, California,
special counsel on California tax matters, under existing law:
The California Trust is not an association taxable as a corporation under
the income tax laws of the State of California;
The income, deductions and credits against tax of the California Trust
will be treated as the income, deductions and credits against tax of the
holders of Units in the California Trust under the income tax laws of the
State of California;
Interest on the bonds held by the California Trust to the extent that
such interest is exempt from taxation under California law will not lose
its character as tax-exempt income merely because that income is passed
through to the holders of Units; however, a corporation subject to the
California franchise tax is required to include that interest income in its
gross income for purposes of determining its franchise tax liability;
Each holder of a Unit in the California Trust will have a taxable event
when the California Trust disposes of a bond (whether by sale, exchange,
redemption, or payment at maturity) or when the Unit holder redeems or
sells his Units. The total tax cost of each Unit to a holder of a Unit in
the California Trust is allocated among each of the bond issues held in the
California Trust (in accordance with the proportion of the California Trust
comprised by each bond issue) in order to determine the holder's per Unit
tax cost for each bond issue, and the tax cost reduction requirements
relating to amortization of bond premium will apply separately to the per
Unit tax cost of each bond issue. Therefore, under some circumstances, a
holder of a Unit may realize taxable gain when the California Trust which
issued such Unit disposes of a bond or the holder's Units are sold or
redeemed for an amount equal to or less than his original cost of the bond
or Unit;
Each holder of a Unit in the California Trust is deemed to be the owner
of a pro rata portion of the California Trust under the personal property
tax laws of the State of California; and
Each Unit holder's pro rata ownership of the bonds held by the California
Trust, as well as the interest income therefrom, is exempt from California
personal property taxes.
MARYLAND TRUST
RISK FACTORS--The Public indebtedness of the State of Maryland (the "State")
and its instrumentalities is divided into three general types. The State issues
general obligation bonds for capital improvements and for various State
projects to the payment of which the State ad valorem property tax is
exclusively pledged. In addition, the Maryland Department of Transportation
issues for transportation purposes its limited, special obligation bonds
payable primarily from specific, fixed-rate excise taxes and other revenues
related mainly to highway use. Certain authorities issue obligations payable
solely from specific non-tax, enterprise fund revenues and for which the State
has no liability and has given no moral obligation assurance.
General obligation bonds of the State are authorized and issued primarily to
provide funds for State-owned capital improvements, including institutions of
higher learning, and the construction of locally owned public schools. Bonds
have also been issued for local government improvements, including grants and
loans for water quality improvement projects and correctional facilities, to
provide funds for repayable loans or outright grants to private, non-profit
cultural or educational institutions, and to fund certain loan and grant
programs.
The Maryland Constitution prohibits the contracting of State debt unless it
is authorized by a law levying an annual tax or taxes sufficient to pay the
debt service within 15 years and prohibiting the repeal of the tax or taxes or
their use for another purpose until the debt is paid. As a uniform practice,
each separate enabling act which authorizes the issuance of general obligation
bonds for a given object or purpose has specifically levied and directed the
collection of an ad valorem property tax on all taxable property in the State.
The Board of Public Works is directed by law to fix by May 1 of each year the
precise rate of such tax necessary to produce revenue sufficient for debt
service requirements of the next fiscal year, which begins July 1. However, the
taxes levied need not be collected if or to the extent that funds sufficient
for debt service requirements in the next fiscal year have been appropriated in
the annual State budget. Accordingly, the Board, in annually fixing the rate of
property tax after the end of the regular legislative session in April, takes
account of appropriations of general funds for debt service.
In the opinion of counsel, the courts of Maryland have jurisdiction to
entertain proceedings and power to grant mandatory injunctive relief to (i)
require the Governor to include in the annual budget a sufficient appropriation
to pay all general obligation bond debt service for the ensuing fiscal year;
(ii) prohibit the General Assembly from taking action to reduce any such
appropriation below the level required for that debt service; (iii) require the
Board of Public Works to fix and collect a tax on all property in the State
subject to assessment for State tax purposes at a rate and in an amount
sufficient to make such payments to the extent that adequate funds are not
provided in the annual budget; and (iv) provide such other relief as might be
necessary to enforce the collection of such taxes and payment of the proceeds
of the tax collection to the holders of general obligation bonds, pari passu,
subject to the inherent constitutional limitations referred to below.
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It is also the opinion of counsel that, while the mandatory injunctive
remedies would be available and while the general obligation bonds of the State
are entitled to constitutional protection against the impairment of the
obligation of contracts, such constitutional protection and the enforcement of
such remedies would not be absolute. Enforcement of a claim for payment of the
principal of or interest on the bonds could be subject to the provisions of any
statutes that may be constitutionally enacted by the United States Congress or
the Maryland General Assembly extending the time for payment or imposing other
constraints upon enforcement.
There is no general debt limit imposed by the Maryland Constitution or public
general laws, but a special committee created by statute annually submits to
the Governor an estimate of the maximum amount of new general obligation debt
that prudently may be authorized. Although the committee's responsibilities are
advisory only, the Governor is required to give due consideration to the
committee's findings in preparing a preliminary allocation of new general debt
authorization for the next ensuing fiscal year.
Consolidated Transportation Bonds are limited obligations issued by the
Maryland Department of Transportation, the principal of which must be paid
within 15 years from the date of issue, for highway, port, transit, rail or
aviation facilities or any combination of such facilities. Debt service on
Consolidated Transportation Bonds is payable from those portions of the excise
tax on each gallon of motor vehicle fuel and the motor vehicle titling tax, all
mandatory motor vehicle registration fees, motor carrier fees, and the
corporate income tax as are credited to the Maryland Department of
Transportation, plus all departmental operating revenues and receipts. Holders
of such bonds are not entitled to look to other sources for payment.
The Maryland Department of Transportation also issues its bonds to provide
financing of local road construction and various other county transportation
projects and facilities. Debt service on these bonds is payable from the
subdivisions' share of highway user revenues held to their credit in a special
State fund.
The Maryland Transportation Authority operates certain highway, bridge and
tunnel toll facilities in the State. The tolls and other revenues received from
these facilities are pledged as security for revenue bonds of the Authority
issued under and secured by a trust agreement between the Authority and a
corporate trustee.
Certain other instrumentalities of the State government are authorized to
borrow money under legislation which expressly provides that the loan
obligations shall not be deemed to constitute a debt or a pledge of the faith
and credit of the State. The Community Development Administration of the
Department of Housing and Community Development, the Board of Trustees of St.
Mary's College of Maryland, the Maryland Environmental Service, the Board of
Regents of the University of Maryland System, the Board of Regents of Morgan
State University, and the Maryland Food Center Authority have issued and have
outstanding bonds of this type. The principal of and interest on bonds issued
by these bodies are payable solely from various sources, principally fees
generated from use of the facilities or enterprises financed by the bonds.
Under a Comprehensive Plan of Financing, as amended, of the Maryland Stadium
Authority, the Authority is authorized to finance the acquisition and
construction of sports facilities at a site within the City of Baltimore. Under
the Plan of Financing, the Authority has engaged in a series of borrowings,
together with certain equity contributions, to finance acquisition of the site,
construction of a baseball stadium and ancillary facilities, and, if a lease
agreement is executed between the Authority and a professional football
franchise, proposes to finance the construction of a football stadium.
The Authority's financings as well as any future financings for a football
stadium are lease-backed revenue obligations, payment of which is secured by,
among other things, an assignment of revenues to be received under a lease of
the sports facilities from the Authority to the State of Maryland; rental
payments due from the State under that lease will be subject to annual
appropriation by the Maryland General Assembly. The State anticipates that
revenues to fund the lease payments will be generated from a variety of
sources, including in each year sports lottery revenues, the net operating
revenues of the Authority and funds from the City of Baltimore.
The Water Quality Revolving Loan Fund is administered by the Water Quality
Financing Administration in the Department of the Environment. The Fund may be
used to provide loans, subsidies and other forms of financial assistance to
local government units for wastewater treatment projects as contemplated by the
1987 amendments to the federal Water Pollution Control Act. The Administration
is authorized to issue bonds secured by revenues of the Fund, including loan
repayments, federal capitalization grants, and matching State grants.
The University of Maryland System, Morgan State University, and St. Mary's
College of Maryland are authorized to issue revenue bonds for the purpose of
financing academic and auxiliary facilities. Auxiliary facilities are any
facilities that furnish a service to students, faculty, or staff, and that
generate income. Auxiliary facilities include housing, eating, recreational,
campus, infirmary, parking, athletic, student union or activity, research
laboratory, testing, and any related facilities.
On August 7, 1989, the Governor issued an Executive Order assigning to the
Department of Budget and Fiscal Planning responsibility to review certain
proposed issuances of revenue and enterprise debt other than private activity
bonds. The Executive Order also provides that the Governor may establish a
ceiling of such debt to be issued during the fiscal year, which ceiling may be
amended by the Governor.
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Although the State has authority to make short-term borrowings in
anticipation of taxes and other receipts up to a maximum of $100 million, in
the past it has not issued short-term tax anticipation and bond anticipation
notes or made any other similar short-term borrowings. However, the State has
issued certain obligations in the nature of bond anticipation notes for the
purpose of assisting several savings and loan associations in qualifying for
Federal insurance and in connection with the assumption by a bank of the
deposit liabilities of an insolvent savings and loan association.
The State has financed the construction and acquisition of various facilities
through conditional purchase, sale-leaseback, and similar transactions. All of
the lease payments under these arrangements are subject to annual appropriation
by the Maryland General Assembly. In the event that appropriations are not
made, the State may not be held contractually liable for the payments.
SAVINGS AND LOAN MATTERS. During the first half of calendar year 1985,
several State-chartered savings and loan associations, the savings accounts of
which were privately insured, experienced unusually heavy withdrawals of funds
by depositors. The resulting decline in the associations' liquid assets led to
the appointment of receivers for the assets of six associations and the
creation of an agency of the State to succeed, by statutory merger, the private
insurer. The savings accounts of all savings and loan associations operating in
the State of Maryland must be insured by either the State agency or the Federal
Savings and Loan Insurance Corporation. The State agency assumed the insurance
liabilities of the private insurance agency with respect to deposits made prior
to May 18, 1985, and insures amounts deposited after that date up to a certain
limit. The legislation establishing the insurance agency provides that "It is
the policy of this State that funds will be appropriated to the [insurance
agency] to the extent necessary to protect holders of savings accounts in
member associations." As of December 31, 1989, depositors of all non-disputed
insured accounts at associations in receivership have been paid in full. The
insurance agency believes that the allowance for estimated insurance losses
will be sufficient to provide for the agency's ultimate liability.
LOCAL SUBDIVISION DEBT. The counties and incorporated municipalities in
Maryland issue general obligation debt for general governmental purposes. The
general obligation debt of the counties and incorporated municipalities is
generally supported by ad valorem taxes on real estate, tangible personal
property and intangible personal property subject to taxation. The issuer
typically pledges its full faith and credit and unlimited taxing power to the
prompt payment of the maturing principal and interest on the general obligation
debt and to the levy and collection of the ad valorem taxes as and when such
taxes become necessary in order to provide sufficient funds to meet the debt
service requirements. The amount of debt which may be authorized may in some
cases be limited by the requirement that it not exceed a stated percentage of
the assessable base upon which such taxes are levied.
In the opinion of counsel, the issuer may be sued in the event that it fails
to perform its obligations under the general obligation debt to the holders of
the debt, and any judgments resulting from such suits would be enforceable
against the issuer. Nevertheless, a holder of the debt who has obtained any
such judgment may be required to seek additional relief to compel the issuer to
levy and collect such taxes as may be necessary to provide the funds from which
a judgment may be paid. Although there is no Maryland law on this point, it is
the opinion of counsel that the appropriate courts of Maryland have
jurisdiction to entertain proceedings and power to grant additional relief,
such as a mandatory injunction, if necessary, to enforce the levy and
collection of such taxes and payment of the proceeds of the collection of the
taxes to the holders of general obligation debt, pari passu, subject to the
same constitutional limitations on enforcement, as described above, as apply to
the enforcement of judgments against the State.
Local subdivisions, including counties and municipal corporations, are also
authorized by law to issue special and limited obligation debt for certain
purposes other than general governmental purposes. The source of payment of
that debt is limited to certain revenues of the issuer derived from commercial
activities operated by the issuer, payments made with respect to certain
facilities or loans, and any funds pledged for the benefit of the holders of
the debt. That special and limited obligation debt does not constitute a debt
of the State, the issuer or any other political subdivision of either within
the meaning of any constitutional or statutory limitation. Neither the State
nor the issuer or any other political subdivision of either is obligated to pay
the debt or the interest on the debt except from the revenues of the issuer
specifically pledged to the payment of the debt. Neither the faith and credit
nor the taxing power of the State, the issuer or any other political
subdivision of either is pledged to the payment of the debt. The issuance of
the debt is not directly or indirectly or contingently an obligation, moral or
other, of the State, the issuer or any other political subdivision of either to
levy any tax for its payment.
WASHINGTON SUBURBAN SANITARY DISTRICT DEBT. The Washington Suburban Sanitary
District operates as a public corporation of the State to provide, as
authorized, water, sewerage and drainage systems, including water supply,
sewage disposal, and storm water drainage facilities for Montgomery County,
Maryland and Prince George's County, Maryland. For the purpose of paying the
principal of and interest on bonds of the District, Maryland law provides for
the levy, annually, against all the assessable property within the District by
the County Council of Montgomery County and the County Council of Prince
George's County of ad valorem taxes sufficient to pay such principal and
interest when due and payable.
Storm water drainage bonds for specific projects are payable from an ad
valorem tax upon all of the property assessed for county tax purposes within
the portion of the District situated in the county in which the storm water
project was, or is to be, constructed.
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Storm water drainage bonds of the District are also guaranteed by such county,
which guaranty operates as a pledge of the full faith and credit of the county
to the payment of the bonds and obligates the county council, to the extent
that the tax revenues referred to above and any other money available or to
become available are inadequate to provide the funds necessary to pay the
principal of and the interest on the bonds, to levy upon all property subject
to taxation within the county ad valorem taxes in rate and in amount sufficient
to make up any such deficiency.
Substantially all of the debt service on the bonds, except storm water
drainage bonds, is being paid from revenues derived by the District from water
consumption charges, front foot benefit charges, and sewage usage charges.
Notwithstanding the payment of principal of and interest on those bonds from
those charges, the underlying security of all bonds of the District is the levy
of ad valorem taxes on the assessable property as stated above.
SPECIAL AUTHORITY DEBT. The State and local governments have created several
special authorities with the power to issue debt on behalf of the State or
local government for specific purposes, such as providing facilities for non-
profit health care and higher educational institutions, facilities for the
disposal of solid waste, funds to finance single family and low-to-moderate
income housing, and similar purposes. The Maryland Health and Higher
Educational Facilities Authority, the Northeast Maryland Waste Disposal
Authority, the Housing Opportunities Commission of Montgomery County, and the
Housing Authority of Prince George's County are some of the special authorities
which have issued and have outstanding debt of this type.
The debts of the authorities issuing debt on behalf of the State and the
local governments are limited obligations of the authorities payable solely
from and secured by a pledge of the revenues derived from the facilities or
loans financed with the proceeds of the debt and from any other funds and
receipts pledged under an indenture with a corporate trustee. The debt does not
constitute a debt, liability or pledge of the faith and credit of the State or
of any political subdivision or of the authorities. Neither the State nor any
political subdivision thereof nor the authorities shall be obligated to pay the
debt or the interest on the debt except from such revenues, funds and receipts.
Neither the faith and credit nor the taxing power of the State or of any
political subdivision of the State or the authorities is pledged to the payment
of the principal of or the interest on such debt. The issuance of the debt is
not directly or indirectly an obligation, moral or other, of the State or of
any political subdivision of the State or of the authority to levy or to pledge
any form of taxation whatsoever, or to make any appropriation, for their
payment. The authorities have no taxing power.
HOSPITAL BONDS. The rates charged by non-governmental Maryland hospitals are
subject to review and approval by the Maryland Health Services Cost Review
Commission. Maryland hospitals subject to regulation by the Commission are not
permitted to charge for services at rates other than those established by the
Commission. In addition, the Commission is required to permit any nonprofit
institution subject to its jurisdiction to charge reasonable rates which will
permit the institution to provide, on a solvent basis, effective and efficient
service in the public interest.
Under an agreement between Medicare and the Commission, Medicare agrees to
pay Maryland hospitals on the basis of Commission-approved rates, less a 6%
differential. Under this so-called "Medicare Waiver", Maryland hospitals are
exempt from the Medicare Prospective Payment System which pays hospitals fixed
amounts for specific services based upon patient diagnosis. No assurance can be
given that Maryland will continue to meet any current or future tests for the
continuation of the Medicare Waiver.
In setting hospital rates, the Commission takes into account each hospital's
budgeted volume of services and cash financial requirements for the succeeding
year. It then establishes the rates of the hospital for the succeeding year
based upon the projected volume and those financial requirements of the
institution which the Commission has deemed to be reasonable. Financial
requirements allowable for inclusion in rates generally include budgeted
operating costs, a "capital facilities allowance", other financial
considerations (such as charity care and bad debts) and discounts allowed
certain payors for prompt payment. Variations from projected volumes of
services are reflected in the rates for the succeeding year. The Commission, on
a selective basis by the application of established review criteria, grants
Maryland hospitals increases in rates to compensate for inflation experienced
by hospitals and for other factors beyond the hospitals' control.
Regulations of the Commission provide that overcharges will in certain
circumstances be deducted from prospective rates. Similarly, undercharges will
in certain circumstances not be recoverable through prospective rates.
The Commission has entered into agreements with certain hospitals to adjust
rates in accordance with a prospectively approved, guaranteed inpatient revenue
per admission program. Those agreements are in addition to the rate adjustment
methodology discussed above. Under the program, a hospital's revenue per
admission is compared to the revenue per admission, as adjusted, for a base
year. Variations from the adjusted base year revenues per admission are added
or deducted, as the case may be, from the hospital's gross revenue and rates
for the following year.
There can be no assurance that the Commission will continue to utilize its
present rate-setting methodology or approve rates which will be sufficient to
ensure payment on an individual hospital's obligations. Future actions by the
Commission or the loss of the Medicare Waiver may adversely affect the
operations of individual hospitals.
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MARYLAND TAXES
In the opinion of Messrs. Weinberg & Green, special Maryland counsel on
Maryland tax matters, under existing law applicable to individuals who are
Maryland residents:
The Maryland Trust will not be treated as an association taxable as a
corporation, and the income of the Maryland Trust will be treated as the
income of the Holders. The Maryland Trust is not a "financial institution"
subject to the Maryland Franchise Tax measured by net earnings. The
Maryland Trust is not subject to Maryland property taxes imposed on the
intangible personal property of certain corporations.
Except as described below in the case of interest paid on private
activity bonds constituting a tax preference for Federal income tax
purposes, a Holder will not be required to include such Holder's pro-rata
share of the earnings of, or distributions from, the Maryland Trust in such
Holder's Maryland taxable income to the extent that such earnings or
distributions represent interest excludable from gross income for Federal
income tax purposes received by the Maryland Trust on obligations of the
State of Maryland, the Government of Puerto Rico, or the Government of Guam
and their respective political subdivisions and authorities. Interest on
Bonds is subject to the Maryland Franchise Tax imposed on "financial
institutions" and measured by net earnings.
In the case of taxpayers who are individuals, Maryland presently imposes
an income tax on items of tax preference with reference to such items as
defined in the Internal Revenue Code, as amended, for purposes of
calculating the Federal alternative minimum tax. Interest paid on certain
private activity bonds is a preference item for purposes of calculating the
Federal alternative minimum tax. Accordingly, if the Maryland Trust holds
such bonds, 50% of the interest on such bonds in excess of a threshold
amount is taxable by Maryland.
A Holder will recognize taxable gain or loss, except in the case of an
individual Holder who is not a Maryland resident, when the Holder disposes
of all or part of such Holder's pro rata portion of the Bonds in the
Maryland Trust. A Holder will be considered to have disposed of all or part
of such Holder's pro rata portion of each Bond when the Holder sells or
redeems all or some of such Holder's Units. A Holder will also be
considered to have disposed of all or part of such Holder's pro rata
portion of a Bond when all or part of the Bond is disposed of by the
Maryland Trust or is redeemed or paid at maturity. Gain included in the
gross income of Holders for federal income tax purposes is, however,
subtracted from income for Maryland income tax purposes to the extent that
the gain is derived from the disposition of Bonds issued by the State of
Maryland and its political subdivisions. Profits realized on the sale or
exchange of Bonds are subject to the Maryland Franchise Tax imposed on
"financial institutions" and measured by net earnings.
Units of the Maryland Trust will be subject to Maryland inheritance and
estate tax only if held by Maryland residents.
Neither the Bonds nor the Units will be subject to Maryland personal
property tax.
The sales of Units in Maryland or the holding of Units in Maryland will
not be subject to Maryland Sales or Use Tax.
MINNESOTA TRUST
RISK FACTORS--The State of Minnesota (the "State") relies heavily on a
progressive individual income tax and a retail sales tax for revenue, which
results in a fiscal system that is sensitive to economic conditions. In the
early 1980's the State of Minnesota experienced financial difficulties due to a
downturn in the State's economy resulting from the national recession. As a
consequence, the State's revenues were significantly lower than anticipated in
the July 1, 1979 to June 30, 1981 biennium and the July 1, 1981 to June 30,
1983 biennium. In response to revenue shortfalls, the legislature broadened and
increased the State sales tax, increased income taxes (by increasing rates and
eliminating deductions) and reduced appropriations and deferred payments of
State aid, including appropriations for and aids to local governmental units.
The State's fiscal problems affected other governmental units within the State,
such as local government, school districts and state agencies, which, in
varying degrees, also faced cash flow difficulties. In certain cases, revenues
of local governmental units and agencies were reduced by the recession. Because
of the State's fiscal problems, Standard & Poor's Corporation reduced its
rating on the State's outstanding general obligation bonds from AAA to AA+ in
August 1981 and to AA in March 1982. Moody's Investors Service, Inc. lowered
its rating on the State's outstanding general obligation bonds from Aaa to Aa
in April 1982.
The State's economy recovered in the July 1, 1983 to June 30, 1985 biennium,
and substantial reductions in the individual income tax were enacted in 1984
and 1985. Standard & Poor's raised its rating on the State's outstanding
general obligation bonds to AA+ in January 1985. In 1986, 1987, 1991, 1992 and
1993, legislation was required to eliminate projected budget deficits by
raising additional revenue, reducing expenditures, including aids to political
subdivisions and higher education, reducing the State's budget reserve (cash
flow account), imposing a sales tax on purchases by local governmental units,
and making other budgetary adjustments. A budget forecast released by the
Minnesota Department of Finance on March 1, 1994 projects a balanced General
Fund at the end of the current biennium, June 30, 1995, plus an increase in the
State's cash flow account from $360 million to $500 million. Total projected
expenditures and transfers for the biennium are $17.0 billion. The forecast
also projects, however, a shortage of $29.5 million in the Local Government
Trust Fund at June 30, 1995, against total projected expenditures from the Fund
of $1.8 billion for the biennium.
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The Minnesota Supreme Court held on April 1, 1994 that numerous banks are
entitled to refunds of Minnesota bank excise taxes paid for tax years 1979
through 1983, on the grounds that interest on federal obligations was
unlawfully included in the computation of the tax for such years. The trial
court has been directed to calculate the amounts to be refunded. The taxes and
interest are estimated to be in excess of $188 million. The State will be
permitted to pay the refunds over a four-year period. The State of Minnesota
also is a party to a variety of other civil actions which could adversely
affect the State's General Fund.
State grants and aids represent a large percentage of the total revenues of
cities, towns, counties and school districts in Minnesota. Even with respect to
Bonds that are revenue obligations of the issuer and not general obligations of
the State, there can be no assurance that the fiscal problems referred to above
will not adversely affect the market value or marketability of the Bonds or the
ability of the respective obligors to pay interest on and principal of the
Bonds.
MINNESOTA TAXES
In the opinion of Dorsey & Whitney, a partnership including professional
corporations, Minneapolis, Minnesota, special counsel on Minnesota tax matters,
under existing law:
The Minnesota Trust is not an association taxable as a corporation for
purposes of Minnesota income taxation. Minnesota taxable net income is, with
certain modifications, determined with reference to federal taxable income.
Each Unit holder of the Minnesota Trust will be treated as the owner of a pro
rata portion of the Minnesota Trust for purposes of Minnesota income taxation,
and the income of the Minnesota Trust will be treated as the income of the Unit
holders under Minnesota law. Interest on Bonds that would be excluded from
Minnesota taxable net income when paid directly to an individual, estate or
trust will be excluded from Minnesota taxable net income of Unit holders that
are individuals, estates or trusts when received by the Minnesota Trust and
when distributed to such Unit holders. Interest on Bonds that would be included
in Minnesota "alternative minimum taxable income" when paid directly to a
noncorporate taxpayer will be included in Minnesota "alternative minimum
taxable income" of Unit holders that are individuals, estates or trusts for
purposes of the Minnesota alternative minimum tax.
Any such Unit holder that is subject to Minnesota income taxation will
realize taxable gain or loss when the Minnesota Trust disposes of a Bond
(whether by sale, exchange, redemption or payment at maturity) or when the Unit
holder redeems or sells Units at a price that differs from original cost, as
adjusted for amortization of bond premium and other basis adjustments
(including any adjustment that may be required to reflect a Unit holder's share
of interest, if any, accruing on Bonds during the interval between the purchase
of the Units and delivery of the Bonds). The total tax cost of each Unit to a
Unit holder is allocated proportionately (by value) among each of the Bonds
held in the Minnesota Trust. Tax cost reduction requirements relating to
amortization of bond premium may, under some circumstances, result in the
realization of taxable gain by Unit holders when their Units (or underlying
Bonds) are sold or redeemed for an amount equal to or less than their original
cost. Minnesota has repealed the favorable treatment of capital gains, but
preserved limitations on the deductibility of capital losses.
Interest income attributable to Bonds that are "industrial development bonds"
or "private activity bonds," as such terms are defined in the Internal Revenue
Code, will be taxable under Minnesota law to a Unit holder that is a
"substantial user" of the facilities financed by the proceeds of such Bonds (or
a "related person" to such a "substantial user") to the same extent as if such
Bonds were held directly by such Unit holder.
Minnesota law does not permit a deduction for interest on indebtedness
incurred or continued by individuals, estates and trusts to purchase or carry
Units. Minnesota law also restricts the deductibility of other expenses
allocable to Units.
With limited exceptions, interest on Bonds in the Minnesota Trust will be
included in taxable income for purposes of the Minnesota franchise tax on
corporations and financial institutions. No opinion is expressed as to other
Minnesota tax effects on Unit holders that are corporations or financial
institutions.
NORTH CAROLINA TRUST
RISK FACTORS--State Economic Profile. North Carolina is basically a rural
state, having only five municipalities with populations in excess of 100,000.
The economic profile of North Carolina consists of a combination of industry,
agriculture, and tourism. Nonagricultural wage and salary employment accounted
for approximately 3,258,300 jobs as of January, 1994. The largest
nonagricultural segment of jobs was the approximately 729,200 persons employed
in trade, with textiles as the largest manufacturing segment employing
approximately 203,600 people. The United States Department of Labor estimates
that as of August, 1993, North Carolina ranked tenth among the states in
nonagricultural employment, eighth in manufacturing employment, and eleventh in
trade. During the period 1980 through 1992, per capita income in North Carolina
grew from $7,999 to $17,667, an increase of approximately 121%. The North
Carolina Employment Security Commission estimated the unadjusted unemployment
rate in February, 1994 to be 5.5% of the labor force, as compared with an
unemployment rate of 7.1% nationwide. Gross agricultural income (excluding farm
forest products) in 1992 was $5.182
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billion. This places North Carolina tenth in the nation in gross agricultural
income. Tobacco production is the leading source of agricultural crop income in
the State, accounting for approximately 20.3% of gross agricultural income in
1992.
STATE FINANCIAL CONDITION. The State's two principal operating accounts are
the General Fund and the Highway Fund. The principal sources of General Fund
tax revenues are the income tax and the sales and use tax. The State
Constitution limits the income tax to a rate of 10% of total net income; the
State actually imposed a maximum rate of 7.75% during the 1993 calendar year.
The State had (audited) General Fund balances at the June 30th year-end of
approximately $254 million, $124 million, ($112) million (deficit balance),
$235 million and $681 million for, respectively, the 1989, 1990, 1991, 1992 and
1993 fiscal years. For the year ended June 30, 1993, the State had total
budgeted appropriations from the General Fund of approximately $10.163 billion.
The State Highway Fund had an ending credit balance of approximately $308
million as of June 30, 1993, with total expenditures of approximately $1.410
billion.
STATE DEBT. As of June 30, 1993, approximately $494 million aggregate
principal amount of the state's general obligation bonds and $87 million of its
highway fund general obligation bonds were outstanding. The highway fund bonds
are payable from the Highway Fund.
In addition, 16 constituent institutions of the University of North Carolina
and 9 agencies or public authorities of the State had approximately $9.539
billion principal amount of revenue bonds outstanding as of June 30, 1993.
There are no bonds of the State outstanding, and no State statutes which would
authorize the issuance of any bonds, which contemplate the appropriation by the
General Assembly of such amount as would be necessary to make up any deficiency
in a debt service reserve fund.
Local governmental units in the State had approximately $4.543 million
principal amount of general obligation bonds and $2.054 billion of revenue
bonds (excluding industrial revenue bonds of county authorities) outstanding as
of June 30, 1993. The State has no financial responsibility with respect to
this debt.
NORTH CAROLINA TAXES
As of the date of this Prospectus, in the opinion of Messrs. Petree Stockton,
L.L.P., special North Carolina counsel on North Carolina tax matters, with
respect to the North Carolina Trust, under then existing law applicable to
persons who are North Carolina residents:
The State of North Carolina imposes a tax upon the taxable income of
individuals, corporations, estates, and trusts. Nonresident individuals are
generally taxed only on income from North Carolina sources. Corporations
doing business within and without North Carolina are entitled to allocate
and apportion their income if they have income from business activity which
is taxable in another state. The mere ownership of Units will not subject a
nonresident Unit holder to the tax jurisdiction of North Carolina.
Counsel has been advised that for federal income tax purposes the North
Carolina Trust will be a grantor trust and not an association taxable as a
corporation. Upon this assumption, counsel is of the opinion that the North
Carolina Trust will be treated as a grantor trust for North Carolina income
tax purposes and not as an association taxable as a corporation. Each
participant in the North Carolina Trust must report his share of the
taxable income of the North Carolina Trust.
The calculation of North Carolina taxable income of an individual,
corporation, estate or trust begins with federal taxable income. Certain
modifications are specified, but no such modification requires the addition
of interest on the obligations of the state of North Carolina, its
political subdivisions, or nonprofit educational institutions organized or
chartered under the laws of North Carolina.
As a general rule, gain (or loss) from the sale of obligations held by
the North Carolina Trust (whether as a result of the sale of such
obligations by the North Carolina Trust or as a result of the sale of a
Unit by a Unit holder) is includable (or deductible) in the calculation of
the Unit holder's North Carolina taxable income. Under the language of
certain enabling legislation such as the North Carolina Hospital
Authorities Act, the North Carolina Health Care Facilities Finance Act, the
North Carolina Housing Finance Agency Act, the act establishing the North
Carolina State Ports Authority, the North Carolina Join Municipal Electric
Power and Energy Act, the act authorizing the organization of business
development corporations, the North Carolina Higher Education Facilities
Finance Act, the North Carolina Agricultural Finance Act, and the act
establishing the North Carolina Solid Waste Management Loan Program,
profits made on the sale of obligations issued by authorities created
thereunder are made expressly exempt from North Carolina income taxation.
The exemption of such profits from North Carolina income taxation does not
require a disallowance of any loss incurred on the sale of such obligations
in the calculation of North Carolina income taxes.
For federal income tax purposes, interest on North Carolina obligations
that would otherwise be exempt from taxation may in certain circumstances
be taxable to the recipient. North Carolina law provides that the interest
on North Carolina obligations shall
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maintain its exemption from North Carolina income taxation notwithstanding
that such interest may be subject to federal income taxation.
North Carolina imposes a tax on persons for the privilege of ownership of
items of intangible personal property. The tax is generally imposed at the
rate of $.25 per $100 of the value of each item of intangible personal
property at December 31 of each year. Bonds and other evidences of
indebtedness of the State of North Carolina, political subdivisions of the
State, agencies of such governmental units, or nonprofit educational
institutions organized or chartered under the laws of North Carolina are
exempt from the intangible personal property tax.
This exemption does not extend to units of ownership of an investment
trust that owns obligations which would be exempt from the intangible
personal property tax if owned directly by the unitholders of the
investment trust. However, the North Carolina Department of Revenue by
regulation has announced that the taxable value of units of ownership in an
investment trust may be reduced by a percentage equal to the ratio of
direct obligations of the United States Government and direct obligations
of the State of North Carolina and its political subdivisions held in the
trust on December 31. Thus, if the assets then held by the North Carolina
Trust consist entirely of direct obligations of the United States
Government and direct obligations of the State of North Carolina and its
political subdivisions, the entire value of the North Carolina Trust Units
will not be subject to the intangible personal property tax under this
regulation.
North Carolina imposes a tax on transfers which occur by reason of death
or by gift. Transfers of obligations of North Carolina, its political
subdivisions, agencies of such governmental units, or nonprofit educational
institutions organized or chartered under the laws of North Carolina are
not exempt from the North Carolina inheritance and gift taxes.
48 U.S.C. (S) 745 provides that bonds issued by the Government of Puerto
Rico, or by its authority, shall be exempt from taxation by any State or by
any country, municipality, or other municipal subdivision of any State.
Accordingly, interest on any such obligations held by the North Carolina
Trust would be exempt from the North Carolina corporate and individual
income taxes. The North Carolina Department of Revenue takes the position
that gains from the sale or other disposition of such obligations are
subject to the North Carolina corporate and individual income taxes. Such
obligations would be treated in the same manner as obligations of the
United States for purposes of the intangible personal property tax and the
application of such tax to units of ownership in an investment trust.
PENNSYLVANIA TRUST
RISK FACTORS--Potential purchasers of Units of the Pennsylvania Trust should
consider the fact that the Trust's portfolio consists primarily of securities
issued by the Commonwealth of Pennsylvania (the "Commonwealth"), its
municipalities and authorities and should realize the substantial risks
associated with an investment in such securities. Although the balance in the
General Fund of the Commonwealth (the principal operating fund of the
Commonwealth) declined to a zero balance at the close of fiscal 1989, and a
negative balance was experienced in fiscal 1990 and 1991, tax increases and
spending decreases helped return the General Fund balance to a surplus at June
30, 1992 of $87.5 million. The deficit in the Commonwealth's
unreserved/undesignated funds was also reduced, from $1,146.2 million at June
30, 1991 to $138.6 million at June 30, 1992.
Pennsylvania's economy historically has been dependent upon heavy industry,
but has diversified recently into various services, particularly into medical
and health services, education and financial services. Agricultural industries
continue to be an important part of the economy, including not only the
production of diversified food and livestock products, but substantial economic
activity in agribusiness and food-related industries. Service industries
currently employ the greatest share of nonagricultural workers, followed by the
categories of trade and manufacturing. Future economic difficulties in any of
these industries could have an adverse impact on the finances of the
Commonwealth or its municipalities and could adversely affect the market value
of the Bonds in the Pennsylvania Trust or the ability of the respective
obligors to make payments of interest and principal due on such Bonds.
Certain litigation is pending against the Commonwealth that could adversely
affect the ability of the Commonwealth to pay debt service on its obligations
including suits relating to the following matters: (i) the ACLU has filed suit
in federal court demanding additional funding for child welfare services; the
Commonwealth settled a similar suit in the Commonwealth Court of Pennsylvania
and is seeking the dismissal of the federal suit, inter alia, because of that
settlement. In April 1993, the federal court granted in part and denied in part
the Commonwealth's motion for summary judgment (no available estimate of
potential liability); (ii) in 1987, the Supreme Court of Pennsylvania held the
statutory scheme for county funding of the judicial system to be in conflict
with the constitution of the Commonwealth, but stayed judgment pending
enactment by the legislature of funding consistent with the opinion and the
legislature has yet to consider legislation implementing the judgment; in 1992,
a new action in mandamus was filed seeking to compel the Commonwealth to comply
with the original decision; (iii) several banks have filed suit against the
Commonwealth contesting the constitutionality of a law enacted in 1989 imposing
a bank shares tax (potential liability estimated at $1.023 billion through June
1993, plus interest); (iv) litigation has been filed in both state and federal
court by an association of rural and small schools and several
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individual school districts and parents challenging the constitutionality of
the Commonwealth's system for funding local school districts--the federal case
has been stayed pending resolution of the state case and the state case is in
the pre-trial stage (no available estimate of potential liability); (v)
litigation has been filed in state court by a variety of plaintiffs challenging
the validity of a number of provisions in the 1991 tax legislation, including
the tax on leased vehicles, the sales tax on periodicals, and the repeal of the
deduction for net operating loss carryforwards; in the net operating loss case,
the Commonwealth Court recently overruled preliminary objections filed by the
Commonwealth, which will allow the litigation to proceed (no available estimate
of potential liability for refund of taxes collected or amount of tax revenue
at risk); (vi) the ACLU has brought a class action suit on behalf of inmates
challenging the conditions of confinement in thirteen of the Commonwealth's
correctional institutions (no available estimate of potential cost of complying
with the injunction sought, but capital and personnel costs might cost millions
of dollars), and (vii) a consortium of public interest law firms has filed a
class action suit alleging that the Commonwealth has not complied with a
federal mandate to provide screening, diagnostic and treatment services for all
Medicaid-eligible children under 21 (attempts are being made to negotiate a
settlement of the case with potential liability estimated at $98 million).
The Commonwealth's general obligation bonds have been rated AA- by Standard &
Poor's and A1 by Moody's for more than the last five years.
The City of Philadelphia (the "City") has been experiencing severe financial
difficulties which has impaired its access to public credit markets and a long-
term solution to the City's financial crisis is still being sought. The City
experienced a series of General Fund deficits for Fiscal Years 1988 through
1991. Additional deficits are expected for the 1992 and 1993 fiscal years. The
City has no legal authority to issue deficit reduction bonds on its own behalf,
but state legislation has been enacted to create an Intergovernmental
Cooperation Authority (the "Authority") to provide fiscal oversight for
Pennsylvania cities (primarily Philadelphia) suffering recurring financial
difficulties. The Authority is broadly empowered to assist cities in avoiding
defaults and eliminating deficits by encouraging the adoption of sound
budgetary practices and issuing bonds. In order for the Authority to issue
bonds on behalf of the City, the City and the Authority entered into an
intergovernmental cooperative agreement providing the Authority with certain
oversight powers with respect to the fiscal affairs of the City, and the
Authority approved a five-year financial plan prepared by the City. A five year
plan that projects a balanced General Fund budget in Fiscal Year 1994 without a
grant from the Authority was approved by the Authority on April 6, 1992. Full
implementation of the five year plan was delayed due to labor negotiations that
were not completed until October 1982, three months after the expiration of the
old labor contracts. In March 1993, Philadelphia filed an amended five year
plan with the Authority, which projects a $6.6 million deficit in the General
Fund for the fiscal year ending June 30, 1993. The City Council and the
Authority have approved a fiscal 1994 budget that projects no deficit for the
fiscal year ending June 30, 1994. In June 1992, the Authority issued
$474,555,000 in bonds to liquidate the City's deficit balance in its general
fund. In July 1993, the Authority issued $643,430,000 of bonds to refund
certain general obligation bonds of the City and to fund additional capital
projects. In September 1993, the Authority issued $178,675,000 of bonds to
advance refund certain of the bonds issued in June 1992.
PENNSYLVANIA TAXES
In the opinion of Messrs. Drinker Biddle & Reath, Philadelphia, Pennsylvania,
special counsel on Pennsylvania tax matters, under existing law:
Units evidencing fractional undivided interests in the Pennsylvania Trust
are not subject to any of the personal property taxes presently in effect
in Pennsylvania to the extent that the Trust is comprised of bonds issued
by the Commonwealth of Pennsylvania, any public authority, commission,
board or other agency created by the Commonwealth of Pennsylvania or any
public authority created by any such political subdivision ("Pennsylvania
Bonds"). The taxes referred to include the County Personal Property Tax
imposed on residents of Pennsylvania by the Act of June 17, 1913, P.L. 507,
as amended, and the additional personal property taxes imposed on
Pittsburgh residents by the School District of Pittsburgh under the Act of
June 20, 1947, P.L. 733, as amended and by the City of Pittsburgh under
Ordinance No. 599 of December 28, 1967. The portion, if any, of such Units
representing bonds or other obligations issued by the Government of Guam or
by its authority, bonds issued by the Government of Puerto Rico or by its
authority, and bonds issued by the Government of the Virgin Islands or by a
municipality thereof (collectively, "Possession Bonds") is not expressly
exempt from taxation under the foregoing Pennsylvania Acts. However, such
bonds are expressly relieved from direct state taxation by United States
statutes. Therefore, Units in the Pennsylvania Trust are not subject to
Personal Property Tax to the extent that the Trust is comprised of
Possession Bonds.
Pennsylvania Trust Units may be subject to tax in the estate of a
resident decedent under the Pennsylvania inheritance and estate taxes.
Income received by a Unit holder attributable to interest realized by the
Pennsylvania Trust from Pennsylvania Bonds, Possession Bonds, and Prior
Trust Units is not taxable to individuals, estates or trusts under the
Personal Income Tax imposed by Article III of the Tax Reform Code of 1971;
to corporations under the Corporate Net Income Tax imposed by Article IV of
the Tax
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Reform Code of 1971; nor to individuals under the Philadelphia School
District Net Income Tax ("School District Tax") imposed on Philadelphia
resident individuals under the authority of the Act of August 9, 1963, P.L.
640.
Income received by a Unit holder attributable to gain on the sale or
other disposition by the Pennsylvania Trust of Pennsylvania Bonds,
Possession Bonds and Prior Trust Units is taxable under the Personal Income
Tax, the Corporate Net Income Tax, and, unless these assets were held by
the Pennsylvania Trust for more than six months, the School District Tax.
To the extent that gain on the disposition of a Unit represents gain
realized on Pennsylvania Bonds held by the Pennsylvania Trust or held by
Prior Trust Units, such gain may be subject to the Personal Income Tax and
Corporate Net Income Tax. Such gain may also be subject to the School
District Tax, except that gain realized with respect to a Unit held for
more than six months is not subject to the School District Tax.
No opinion is expressed regarding the extent, if any, to which Units, or
interest and gain thereon, is subject to, or included in the measure of, the
special taxes imposed by the Commonwealth of Pennsylvania on banks and other
financial institutions or with respect to any privilege, excise, franchise or
other tax imposed on business entities not discussed herein (including the
Corporate Capital Stock/Foreign Franchise Tax).
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<PAGE>
TAX FREE VS. TAXABLE INCOME
The following tables show the approximate yields which taxable securities
must earn in various income brackets to equal tax exempt yields under combined
Federal and state individual income tax rates. This table reflects Federal
income tax rates and tax brackets for the 1994 taxable year under the Code as
in effect on the date of this Prospectus and state income tax rates that were
available on the date of the Prospectus. Because the Federal rate brackets are
subject to adjustment based on changes in the Consumer Price Index, the
taxable equivalent yields for subsequent years may be lower than indicated. A
table is computed on the theory that the taxpayer's highest bracket tax rate
is applicable to the entire amount of any increase or decrease in taxable
income (after allowance for any resulting change in state income tax)
resulting from a switch from taxable to tax-free securities or vice versa.
Variations between state and Federal allowable deductions and exemptions are
generally ignored. The state tax is thus computed by applying to the Federal
taxable income bracket amounts shown in the table the appropriate state rate
for those same dollar amounts. For example, a married couple living in the
State of [California] and filing a Joint Return with $53,000 in taxable income
for the 1994 tax year would need a taxable investment yielding 9.058% in order
to equal a tax-free return of 6.00%. Use the appropriate table to find your
tax bracket. Read across to determine the approximate taxable yield you would
need to equal a return free of Federal income tax and state income tax.
STATE OF CALIFORNIA
1994 TAX YEAR
<TABLE>
<CAPTION>
APPROX. COMBINED TAX EXEMPT YIELD
TAXABLE FEDERAL & STATE 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00
INCOME BRACKET* TAX RATE
TAXABLE EQUIVALENT YIELD
JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 22,118 to 34,906 18.400% 4.289 4.901 5.514 6.127 6.740 7.353 7.966 8.578
$ 34,906 to 36,900 20.100% 4.380 5.006 5.632 6.257 6.883 7.509 8.135 8.761
$ 36,900 to 48,456 32.320% 5.171 5.910 6.648 7.387 8.126 8.865 9.604 10.343
$ 48,456 to 61,240 33.760% 5.283 6.038 6.793 7.548 8.303 9.058 9.813 10.568
$ 61,240 to 89,150 34.696% 5.359 6.125 6.890 7.656 8.422 9.188 9.953 10.719
$ 89,150 to 140,000 37.417% 5.592 6.391 7.190 7.989 8.788 9.587 10.386 11.185
$140,000 to 212,380 41.952% 6.029 6.890 7.752 8.613 9.474 10.336 11.197 12.058
$212,380 to 250,000 42.400% 6.076 6.944 7.812 8.680 9.548 10.416 11.284 12.152
$250,000 to 424,760 45.640% 6.438 7.358 8.278 9.197 10.117 11.037 11.957 12.877
Over $424,760 46.244% 6.510 7.441 8.371 9.301 10.231 11.161 12.091 13.021
<CAPTION>
SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 24,228 to 30,620 33.760% 5.283 6.038 6.793 7.548 8.303 9.058 9.813 10.568
$ 30,620 to 53,500 34.696% 5.359 6.125 6.890 7.656 8.422 9.188 9.953 10.719
$ 53,500 to 106,190 37.417% 5.592 6.391 7.190 7.989 8.788 9.587 10.386 11.185
$106,190 to 115,000 37.900% 5.636 6.441 7.246 8.051 8.856 9.661 10.467 11.272
$115,000 to 212,380 42.400% 6.076 6.944 7.812 8.680 9.548 10.416 11.284 12.152
$212,380 to 250,000 43.040% 6.144 7.022 7.900 8.778 9.655 10.533 11.411 12.289
Over $250,000 46.244% 6.510 7.441 8.371 9.301 10.231 11.161 12.091 13.021
</TABLE>
- -------
* The income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions (including the
deduction for state income tax). If the standard deduction had been taken
for Federal income tax purposes in order to reach the amount shown in the
table, the taxable equivalent yield required to equal a specified tax-exempt
yield would be at least as great as that shown in the table. It is assumed
that the investor is not subject to the alternative minimum tax. Where
applicable, investors should take into account the provisions of the Code
under which the benefit of certain itemized deductions and the benefit of
personal exemptions are limited in the case of higher income individuals.
Under the Code, an individual taxpayer with adjusted gross income in excess
of a $111,800 threshold amount is subject to an overall limitation on
certain itemized deductions, requiring a reduction equal to the lesser of
(i) 3% of adjusted gross income in excess of the $111,800 threshold amount
or (ii) 80% of the amount of such itemized deductions otherwise allowable.
The benefit of each personal exemption is phased out for married taxpayers
filing a joint return with adjusted gross income in excess of $167,700 and
for single taxpayers with adjusted gross income in excess of $111,800.
Personal exemptions are phased out at the rate of two percentage points for
each $2,500 (or fraction thereof) of adjusted gross income in excess of the
applicable threshold amount. California has adopted provisions corresponding
to the Federal law provisions limiting the benefit of certain itemized
deductions and phasing out the benefit of personal exemptions. However, the
California threshold amounts and percentage reductions differ from those
applicable under Federal law. The Federal and California tax brackets, the
threshold amounts at which itemized deductions are subject to reduction, and
the range over which personal exemptions are phased out will be adjusted for
inflation. The 36% and the 39.6% Federal tax brackets will, however, be
adjusted for inflation only for years after 1994.
C-16
<PAGE>
STATE OF MARYLAND*
1994 TAX YEAR
<TABLE>
<CAPTION>
APPROX. COMBINED
FEDERAL, STATE TAX EXEMPT YIELD
TAXABLE AND LOCAL 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00
INCOME BRACKET** TAX RATE
TAXABLE EQUIVALENT YIELD
JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 20,000 to 36,900 21.800% 4.475 5.115 5.754 6.393 7.033 7.672 8.312 8.951
$ 36,900 to 89,150 33.760% 5.283 6.038 6.793 7.548 8.303 9.057 9.812 10.567
$ 89,150 to 140,000 36.520% 5.513 6.301 7.088 7.876 8.664 9.451 10.239 11.027
$140,000 to 150,000 41.120% 5.944 6.793 7.642 8.491 9.341 10.190 11.039 11.888
$150,000 to 250,000 41.760% 6.009 6.868 7.726 8.585 9.443 10.302 11.160 12.019
Over $250,000 45.036% 6.367 7.277 8.187 9.096 10.006 10.916 11.825 12.735
<CAPTION>
SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 15,000 to 22,100 21.800% 4.475 5.115 5.754 6.393 7.033 7.672 8.312 8.951
$ 22,100 to 53,500 33.760% 5.283 6.038 6.793 7.548 8.303 9.057 9.812 10.567
$ 53,500 to 100,000 36.520% 5.513 6.301 7.088 7.876 8.664 9.451 10.239 11.027
$100,000 to 115,000 37.210% 5.574 6.370 7.166 9.555 8.759 9.555 10.351 11.148
$115,000 to 250,000 41.760% 6.009 6.868 7.726 8.585 9.443 10.302 11.160 12.019
Over $250,000 45.036% 6.367 7.277 8.187 9.096 10.006 10.916 11.825 12.735
</TABLE>
- -------
* The combined tax rate in the table includes local income taxes imposed by
Maryland counties and the city of Baltimore at a rate of 60% of the state
income tax liability with respect to taxable income of $150,000 or below in
the case of a joint return and $100,000 or below in the case of a single
return and 50% of the state income tax liability with respect to taxable
income in excess of $150,000 in the case of a joint return and $100,000 in
the case of a single return. Investors who are residents of Maryland
counties that impose county income tax at a rate that is less than these
rates will have a taxable equivalent yield that is less than that indicated
in the table.
** The income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions (including the
deductions for state and local income taxes). If the standard deduction had
been taken for Federal income tax purposes, the taxable equivalent yield
required to equal a specified tax-exempt yield would be at least as great
as that shown in the table. It is assumed that the investor is not subject
to the alternative minimum tax. Where applicable, investors should take
into account the provisions of the Code under which the benefit of certain
itemized deductions and the benefit of personal exemptions are limited in
the case of higher income individuals. Under the Code, an individual
taxpayer with adjusted gross income in excess of a $111,800 threshold
amount is subject to an overall limitation on certain itemized deductions,
requiring a reduction equal to the lesser of (i) 3% of adjusted gross
income in excess of the $111,800 threshold amount or (ii) 80% of the amount
of such itemized deductions otherwise allowable. The benefit of each
personal exemption is phased out for married taxpayers filing a joint
return with adjusted gross income in excess of $167,700 and for single
taxpayers with adjusted gross income in excess of $111,800. Personal
exemptions are phased out at the rate of two percentage points for each
$2,500 (or fraction thereof) of adjusted gross income in excess of the
applicable threshold amount. The 15%, 28% and 31% Federal tax brackets, the
threshold amounts at which itemized deductions are subject to reduction,
and the range over which personal exemptions are phased out will be
adjusted for inflation. The 36% and 39.6% Federal tax brackets will be
adjusted for inflation for each year after 1994. The 6% Maryland state
income tax rate with respect to taxable income in excess of $150,000 in the
case of a joint return and $100,000 in the case of a single return is
scheduled to revert to 5% after 1994.
STATE OF MINNESOTA
1994 TAX YEAR
<TABLE>
<CAPTION>
APPROX. COMBINED TAX EXEMPT YIELD
TAXABLE FEDERAL & STATE 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00
INCOME BRACKET* TAX RATE
TAXABLE EQUIVALENT YIELD
JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 22,260 to 38,000 21.800% 4.476 5.115 5.754 6.394 7.033 7.672 8.312 8.951
$ 38,000 to 88,460 33.760% 5.284 6.039 6.793 7.548 8.303 9.058 9.813 10.568
$ 88,460 to 91,850 34.120% 5.313 6.072 6.831 7.590 8.349 9.107 9.866 10.625
$ 91,850 to 140,000 36.865% 5.544 6.336 7.128 7.920 8.711 9.503 10.295 11.087
$140,000 to 250,000 41.440% 5.977 6.831 7.684 8.538 9.392 10.246 11.100 11.954
Over $250,000 44.734% 6.333 7.238 8.142 9.047 9.952 10.857 11.761 12.666
<CAPTION>
SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 15,230 to 22,750 21.800% 4.476 5.115 5.754 6.394 7.033 7.672 8.312 8.951
$ 22,750 to 50,030 33.760% 5.284 6.039 6.793 7.548 8.303 9.058 9.813 10.568
$ 50,030 to 55,100 34.120% 5.313 6.072 6.831 7.590 8.349 9.107 9.866 10.625
$ 55,100 to 115,000 36.865% 5.544 6.336 7.128 7.920 8.711 9.503 10.295 11.087
$115,000 to 250,000 41.440% 5.977 6.831 7.684 8.538 9.392 10.246 11.100 11.954
Over $250,000 44.734% 6.333 7.238 8.142 9.047 9.952 10.857 11.761 12.666
</TABLE>
- -------
* The income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions and itemized deductions (including the
deduction for state income tax). If the standard deduction had been taken
for Federal income tax purposes in order to reach the amount shown in the
table, the taxable equivalent yield required to equal a specified tax-exempt
yield would be at least as great as that shown in the table. It is assumed
that the investor is not subject to the alternative minimum tax. Where
applicable, investors should take into account the provisions of the Code
under which the benefit of certain itemized deductions and the benefit of
personal exemptions are limited in the case of higher income individuals.
Under the Code, an individual taxpayer with adjusted gross income in excess
of a $111,800 threshold amount is subject to an overall limitation on
certain itemized deductions, requiring a reduction equal to the lesser of
(i) 3% of adjusted gross income in excess of the $111,800 threshold amount
or (ii) 80% of the amount of such itemized deductions otherwise allowable.
The benefit of each personal exemption is phased out for married taxpayers
filing a joint return with adjusted gross income in excess of $167,700 and
for single taxpayers with adjusted gross income in excess of $111,800.
Personal exemptions are phased out at the rate of two percentage points for
each $2,500 (or fraction thereof) of adjusted gross income in excess of the
applicable threshold amount. The Federal and Minnesota tax brackets, the
threshold amounts at which itemized deductions are subject to reduction, and
the range over which personal exemptions are phased out will be adjusted for
inflation for each year after 1994.
C-17
<PAGE>
STATE OF NORTH CAROLINA
1994 TAX YEAR
<TABLE>
<CAPTION>
APPROX. COMBINED TAX EXEMPT YIELD
TAXABLE FEDERAL & STATE 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00
INCOME BRACKET* TAX RATE
TAXABLE EQUIVALENT YIELD
JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 21,250 to 38,000 20.950% 4.427 5.060 5.692 6.325 6.957 7.590 8.222 8.855
$ 38,000 to 91,850 33.040% 5.277 5.973 6.720 7.467 8.213 8.960 9.707 10.454
$ 91,850 to 100,000 35.830% 5.454 6.233 7.012 7.791 8.571 9.350 10.129 10.908
$100,000 to 140,000 36.347% 5.498 6.284 7.069 7.855 8.640 9.426 10.211 10.997
$140,000 to 250,000 40.960% 5.928 6.775 7.622 8.468 9.315 10.162 11.009 11.856
Over $250,000 44.281% 6.281 7.178 8.076 8.973 9.871 10.768 11.665 12.563
<CAPTION>
SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 12,750 to 22,750 20.950% 4.427 5.060 5.692 6.325 6.957 7.590 8.222 8.855
$ 22,750 to 55,100 33.040% 5.227 5.973 6.720 7.467 8.213 8.980 9.707 10.454
$ 55,100 to 60,000 35.830% 5.454 6.233 7.012 7.791 8.571 9.350 10.129 10.908
$ 60,000 to 115,000 36.347% 5.498 6.284 7.069 7.855 8.640 9.426 10.211 10.997
$115,000 to 250,000 40.960% 5.928 6.775 7.622 8.468 9.315 10.162 11.009 11.856
Over $250,000 44.281% 6.281 7.178 8.076 8.973 9.871 10.768 11.665 12.563
</TABLE>
- -------
* The income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions and itemized deductions (including the
deduction for state income tax). If the standard deduction had been taken
for Federal income tax purposes in order to reach the amount shown in the
table, the taxable equivalent yield required to equal a specified tax-exempt
yield would be at least as great as that shown in the table. It is assumed
that the investor is not subject to the alternative minimum tax. Where
applicable, investors should take into account the provisions of the Code
under which the benefit of certain itemized deductions and the benefit of
personal exemptions are limited in the case of higher income individuals.
Under the Code, individual taxpayers with adjusted gross income in excess of
a $111,800 threshold amount are subject to an overall limitation on certain
itemized deductions, requiring a reduction equal to the lesser of (i) 3% of
adjusted gross income in excess of the $111,800 threshold amount or (ii) 80%
of the amount of such itemized deductions otherwise allowable. The benefit
of each personal exemption is phased out for married taxpayers filing a
joint return with adjusted gross income in excess of $167,700 and for single
taxpayers with adjusted gross income in excess of $111,800. Personal
exemptions are phased out at the rate of two percentage points for each
$2,500 (or fraction thereof) of adjusted gross income in excess of the
applicable threshold amount. The 15%, 28%, 31%, 36%, and 39.6% Federal tax
brackets, the threshold amounts at which itemized deductions are subject to
reduction, and the range over which personal exemptions are phased out will
be adjusted for inflation for each year after 1994.
COMMONWEALTH OF PENNSYLVANIA
1994 TAX YEAR
<TABLE>
<CAPTION>
APPROX. COMBINED TAX EXEMPT YIELD
TAXABLE FEDERAL & STATE 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00
INCOME BRACKET* TAX RATE
TAXABLE EQUIVALENT YIELD
JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 to 38,000 17.380% 4.236 4.841 5.447 6.052 6.657 7.262 7.867 8.473
$ 38,000 to 91,850 30.016% 5.001 5.716 6.430 7.144 7.859 8.573 9.288 10.002
$ 91,850 to 140,000 32.932% 5.219 5.964 6.710 7.455 8.201 8.946 9.692 10.437
$140,000 to 250,000 37.792% 5.626 6.430 7.234 8.037 8.841 9.645 10.449 11.253
Over $250,000 41.291% 5.962 6.813 7.665 8.516 9.368 10.220 11.072 11.923
<CAPTION>
SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 to 22,750 17.380% 4.236 4.841 5.447 6.052 6.657 7.262 7.867 8.473
$ 22,750 to 53,100 30.016% 5.001 5.716 6.430 7.144 7.859 8.573 9.288 10.002
$ 53,100 to 115,000 32.932% 5.219 5.964 6.710 7.455 8.201 8.946 9.692 10.437
$115,000 to 250,000 37.792% 5.626 6.430 7.234 8.037 8.841 9.645 10.449 11.253
Over $250,000 41.291% 5.962 6.813 7.665 8.516 9.368 10.220 11.072 11.923
</TABLE>
- -------
* The income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions (including the
deduction for state income tax). If the standard deduction had been taken
for Federal income tax purposes in order to reach the amount shown in the
table, the taxable equivalent yield required to equal a specified tax-exempt
yield would be at least as great as that shown in the table. It is assumed
that the investor is not subject to the alternative minimum tax. Where
applicable, investors should take into account the provisions of the Code
under which the benefit of certain itemized deductions and the benefit of
personal exemptions are limited in the case of higher income individuals.
Under the Code, individual taxpayers with adjusted gross income in excess of
a $111,800 threshold amount are subject to an overall limitation on certain
itemized deductions, requiring a reduction equal to the lesser of (i) 3% of
adjusted gross income in excess of the $111,800 threshold amount or (ii) 80%
of the amount of such itemized deductions otherwise allowable. The benefit
of each personal exemption is phased out for married taxpayers filing a
joint return with adjusted gross income in excess of $167,700 and for single
taxpayers with adjusted gross income in excess of $111,800. Personal
exemptions are phased out at the rate of two percentage points for each
$2,500 (or fraction thereof) of adjusted gross income in excess of the
applicable threshold amount. The 15%, 28% and 31% Federal tax brackets, the
threshold amounts at which itemized deductions are subject to reduction, and
the range over which personal exemptions are phased out will be adjusted for
inflation for each year. The 36% and 39.6% Federal tax brackets will be
adjusted for inflation for each year after 1994. The above table does not
reflect the impact of the income tax imposed by the School District of
Philadelphia.
C-18
<PAGE>
UT6012
PROSPECTUS
THIS PROSPECTUS CONTAINS INFORMATION CONCERNING THE TRUST AND THE SPONSORS,
BUT DOES NOT CONTAIN ALL THE INFORMATION SET FORTH IN THE REGISTRATION
STATEMENTS AND EXHIBITS RELATING THERETO, WHICH THE TRUST HAS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C., UNDER THE SECURITIES ACT
OF 1933 AND THE INVESTMENT COMPANY ACT OF 1940, AND TO WHICH REFERENCE IS
HEREBY MADE.
INDEX:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF ESSENTIAL INFORMATION........................................... A-2
PORTFOLIO SUMMARY AS OF DATE OF DEPOSIT.................................... A-4
UNDERWRITING............................................................... A-7
INDEPENDENT AUDITORS' REPORT............................................... A-10
STATEMENT OF FINANCIAL CONDITION OF THE TAX EXEMPT SECURITIES TRUST........ A-11
NOTES TO PORTFOLIO OF SECURITIES........................................... A-17
TAX EXEMPT SECURITIES TRUST................................................ B-1
THE TRUSTS................................................................ B-1
OBJECTIVES................................................................ B-1
PORTFOLIO................................................................. B-1
THE UNITS................................................................. B-10
TAXES..................................................................... B-10
EXPENSES AND CHARGES...................................................... B-12
PUBLIC OFFERING............................................................ B-13
OFFERING PRICE............................................................ B-13
METHOD OF EVALUATION...................................................... B-13
DISTRIBUTION OF UNITS..................................................... B-14
MARKET FOR UNITS.......................................................... B-14
EXCHANGE OPTION........................................................... B-14
REINVESTMENT PROGRAMS..................................................... B-15
SPONSORS' AND UNDERWRITERS' PROFITS....................................... B-15
RIGHTS OF UNIT HOLDERS..................................................... B-15
CERTIFICATES.............................................................. B-15
DISTRIBUTION OF INTEREST AND PRINCIPAL.................................... B-16
REPORTS AND RECORDS....................................................... B-17
REDEMPTION OF UNITS....................................................... B-17
SPONSORS................................................................... B-18
LIMITATIONS ON LIABILITY.................................................. B-19
RESPONSIBILITY............................................................ B-19
RESIGNATION............................................................... B-19
TRUSTEE.................................................................... B-20
LIMITATIONS ON LIABILITY.................................................. B-20
RESIGNATION............................................................... B-20
EVALUATOR.................................................................. B-20
LIMITATIONS ON LIABILITY.................................................. B-20
RESPONSIBILITY............................................................ B-20
RESIGNATION............................................................... B-20
AMENDMENT AND TERMINATION OF THE TRUST AGREEMENT........................... B-21
AMENDMENT................................................................. B-21
TERMINATION............................................................... B-21
LEGAL OPINION.............................................................. B-21
AUDITORS................................................................... B-21
BOND RATINGS............................................................... B-21
FEDERAL TAX FREE VS. TAXABLE INCOME........................................ B-23
THE STATE TRUSTS........................................................... C-1
TAX FREE VS. TAXABLE INCOME................................................ C-16
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, SECURITIES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL
TO MAKE SUCH OFFER IN SUCH STATE.
TAX EXEMPT SECURITIES TRUST
------------
13,500 UNITS
------------
Prospectus
Dated May 5, 1994
------------
SPONSORS
SMITH BARNEY
SHEARSON INC.
1345 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10105
(212) 698-5300
------------
KIDDER, PEABODY & CO.
INCORPORATED
60 BROAD STREET
NEW YORK, NEW YORK 10004
(212) 656-1609
<PAGE>
PART II. ADDITIONAL INFORMATION NOT REQUIRED IN PROSPECTUS
A. The following information relating to the Depositors is incorporated by
reference to the SEC filings indicated and made a part of this Registration
Statement.
<TABLE>
<CAPTION>
SEC FILE OR
IDENTIFICATION NO.
------------------
<S> <C> <C>
I. Bonding Arrangements and Date of Organization of the Depositors
filed pursuant to Items A and B of Part II of the Registration
Statement on Form S-6 under the Securities Act of 1993:
Smith Barney Shearson Inc. 2-55436
Kidder, Peabody & Co. Incorporated
II. Information as to Officers and Directors of the Depositors filed
pursuant to Schedules A and D of Form BD under Rules 15b1-1 and
15b3-1 of the Securities Exchange Act of 1934:
Smith Barney Shearson Inc. 8-8177
Kidder, Peabody & Co. Incorporated 8-4831
III. Charter documents of the Depositors filed as Exhibits to the Reg-
istration Statement on Form S-6 under the Securities Act of 1933
(Charter, By-Laws):
Smith Barney Shearson Inc. 33-65332, 33-36037
Kidder, Peabody & Co. Incorporated 33-17979, 33-20499
B. The Internal Revenue Service Employer Identification Numbers of the
Sponsors and Trustee are as follows:
Smith Barney Shearson Inc. 13-1912900
Kidder, Peabody & Co. Incorporated 13-5650440
United States Trust Company of New York, Trustee 13-5459866
</TABLE>
II-1
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
THE REGISTRATION STATEMENT ON FORM S-6 COMPRISES THE FOLLOWING PAPERS AND
DOCUMENTS:
The facing sheet of Form S-6.
The Cross-Reference Sheet (incorporated by reference to the Cross-Reference
Sheet to the Registration Statement of Tax Exempt Securities Trust, Series
384, 1933 Act File No. 33-50915).
The Prospectus.
Additional Information not included in the Prospectus (Part II).
Consent of Independent Auditors.
The following exhibits:
<TABLE>
<C> <S>
1.1 --Form of Trust Indenture and Agreement (incorporated by reference to
Exhibit 4.a to the Registration Statement of Tax Exempt Securities
Trust, Series 265, 1933 Act File No. 33-15123).
1.1.1 --Form of Reference Agreement Trust (incorporated by reference to
Exhibit 4.b to the Registration Statement of Tax Exempt Securities
Trust, Series 384, 1993 Act File No. 33-50915).
1.2 --Form of Agreement Among Underwriters (incorporated by reference to
Exhibit 99 to the Registration Statement of Tax Exempt Securities
Trust, Series 384, 1933 Act File No. 33-50915).
2.1 --Form of Certificate of Beneficial Interest (included in Exhibit 1.1).
3.1 --Opinion of counsel as to the legality of the securities being issued
including their consent to the use of their name under the headings
"Taxes", "Legal Opinion" and "New York Taxes" in the Prospectus.
4.1 --Consent of the Evaluator.
</TABLE>
II-2
<PAGE>
SIGNATURES
The registrant, Tax Exempt Securities Trust, Series 393, hereby identifies
Series 1 and Series 357 of the Trust for purposes of the representations
required by Rule 487 and represents the following:
(1) That the portfolio securities deposited in the series as to the
securities of which this Registration Statement is being filed do not
differ materially in type or qualify from those deposited in such previous
series;
(2) That, except to the extent necessary to identify the specific
portfolio securities deposited in, and to provide essential financial
information for, the series with respect to the securities of which this
Registration Statement is being filed, this Registration Statement is being
filed, this Registration Statement does not contain disclosures that differ
in any material respect from those contained in the registration statements
for such previous series as to which the effective date was determined by
the Commission or the staff; and
(3) That is has complied with Rule 460 under the Securities Act of 1933.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT THERETO TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW
YORK, AND STATE OF NEW YORK, ON THE 5TH DAY OF MAY, 1994.
Signatures appear on pages II-4 and II-5.
A majority of the members of the Board of Directors of Smith Barney Shearson
Inc. has signed this Registration Statement or Amendment to the Registration
Statement pursuant to Powers of Attorney authorizing the person signing this
Registration Statement or Amendment to the Registration Statement to do so on
behalf of such members.
A majority of the members of the Board of Directors of Kidder, Peabody & Co.
Incorporated has signed this Registration Statement or Amendment to the
Registration Statement pursuant to Powers of Attorney authorizing the person
signing this Registration Statement or Amendment to the Registration Statement
to do so on behalf of such members.
II-3
<PAGE>
Smith Barney Shearson Inc., Depositor
/s/ George S. Michinard, Jr.
By .................................
(GEORGE S. MICHINARD, JR.)
By the following persons*, who
constitute a majority of the
directors of Smith Barney Shearson
Inc.:
Steven D. Black
James S. Boshart III
Robert A. Case
Robert K. Difazio
James Dimon
Robert Druskin
Herbert Dunn
Toni A. Elliot
Lewis L. Glucksman
Robert F. Greenhill
John B. Hoffmann
A. Richard Janiak, Jr.
Robert Q. Jones
Robert B. Kane
Robert H. Lessen
Jeffrey B. Lane
Thomas A. Maguire, Jr.
Howard D. Marsh
John F. McCann
William J. Mills, II
John C. Morris
Charles O'Connor
Hugh J. O'Hare
Joseph J. Plumeri II
Jack L. Rivkin
A. George Saks
Bruce D. Sargent
Don M. Shagrin
David M. Standridge
Jacques S. Theriot
Melvin B. Taub
Stephen Treadway
Paul Underwood
Philip M. Waterman, Jr.
/s/ George S. Michinard, Jr.
By ..................................
(GEORGE S. MICHINARD, JR.,
ATTORNEY-IN-FACT)
- --------
* Pursuant to Powers of Attorney filed under the 1933 Act file Numbers 33-
56722 and 33-51999.
II-4
<PAGE>
Kidder, Peabody & Co. Incorporated,
Depositor
/s/ Gilbert R. Ott, Jr.
By ..................................
(GILBERT R. OTT, JR.)
By the following persons,* who
constitute a majority of the Board
of Directors of Kidder, Peabody &
Co. Incorporated:
Michael A. Carpenter
Edward A. Cerullo
Theodore J. Johnson
Michael A. M. Keehner
John M. Liftin
C. Edward Midgley
James A. Mullin
Richard W. O'Donnell
Thomas F. Ryan, Jr.
Douglas T. Tansill
/s/ Gilbert R. Ott, Jr.
By ..................................
(GILBERT R. OTT, JR., ATTORNEY-IN-
FACT)
- --------
* Pursuant to Powers of Attorney filed under the 1933 Act File Number 33-
52529.
II-5
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
To the Sponsors and Unit Holders of
Tax Exempt Securities Trust, Series 393:
We consent to the use of our report dated May 4, 1994 included herein and
to the reference to our firm under the heading "Auditors" in the Prospectus.
KPMG Peat Marwick
New York, N.Y.
May 4, 1994
<PAGE>
EXHIBIT 3.1
DAVIS POLK & WARDWELL
450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 450-4000
May 4, 1994
Tax Exempt Securities Trust,
Series 393
Smith Barney Shearson Inc.
Kidder, Peabody & Co., Incorporated
c/oSmith Barney Shearson Inc.
1345 Avenue of the Americas
New York, New York 10105
Dear Sirs:
We have acted as special counsel for you, as sponsors (the "Sponsors") of
Series 393 of Tax Exempt Securities Trust (the "Trusts"), in connection with
the issuance of units of fractional undivided interest in the Trusts (the
"Units") in accordance with the Trust Indenture and Agreement and related
Reference Trust Agreement relating to the Trusts (the "Indenture").
We have examined and are familiar with originals or copies, certified or
otherwise identified to our satisfaction, of such documents and instruments as
we have deemed necessary or advisable for the purpose of this opinion.
Based upon the foregoing, we are of the opinion that (i) the execution and
delivery of the Indenture and the issuance of the Units have been duly
authorized by the Sponsors and (ii) the Units, when duly issued and delivered
by the Sponsors and the Trustee in accordance with the Indenture, will be
legally issued, fully paid and non-assessable.
We hereby consent to the use of this opinion as Exhibit 3.1 to the
Registration Statement relating to the Units filed under the Securities Act of
1933 and to the use of our name in such Registration Statement and in the
related prospectus under the headings "Taxes" and "Legal Opinion".
Very truly yours,
Davis Polk & Wardwell
<PAGE>
EXHIBIT 4.1
KENNY S&P EVALUATION SERVICES
A Division of Kenny Information Systems, Inc.
65 Broadway
New York, New York 10006-2511
Telephone: 212/770-4900
F. A. Shinal
Senior Vice President
Chief Financial Officer
May 4, 1994
Smith Barney Shearson Inc.
1345 Avenue of the Americas
New York, N.Y. 10105
United States Trust Company
114 W. 47th Street
New York, N.Y. 10036
Re: Tax-Exempt Securities Trust, Series 393
Gentlemen:
We have examined Registration Statement File No. 33-53199 for the above-
captioned trust. We hereby acknowledge that Kenny S&P Evaluation Services, a
division of Kenny Information Systems, Inc. is currently acting as the
evaluator for the trust. We hereby consent to the use in the Registration
Statement of the reference to Kenny S&P Evaluation Services, a division of
Kenny Information Systems, Inc. as evaluator.
In addition, we hereby confirm that the ratings indicated in the Registration
Statement for the respective bonds comprising the trust portfolio are the
ratings indicated in our KENNYBASE database.
You are hereby authorized to file a copy of this letter with the Securities
and Exchange Commission.
Sincerely,
F. A. Shinal
Senior Vice President
Chief Financial Officer
